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EX-32.1 - EXHIBIT 32.1 - BLACKHAWK NETWORK HOLDINGS, INChawk-20170617x10qex321.htm
EX-31.2 - EXHIBIT 31.2 - BLACKHAWK NETWORK HOLDINGS, INChawk-20170617x10qex312.htm
EX-31.1 - EXHIBIT 31.1 - BLACKHAWK NETWORK HOLDINGS, INChawk-20170617x10qex311.htm
EX-10.4 - EXHIBIT 10.4 - BLACKHAWK NETWORK HOLDINGS, INChawk-20170617x10qex104.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549 
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 17, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-35882 
 
BLACKHAWK NETWORK HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
43-2099257
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
6220 Stoneridge Mall Road
Pleasanton, CA
 
94588
(Address of Principal Executive Offices)
 
(Zip Code)
(925) 226-9990
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
 
Accelerated filer
 
¨
 
 
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Emerging growth company
 
¨
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of July 19, 2017, there were 56,655,000 shares of the Registrant’s common stock outstanding.
 



Blackhawk Network Holdings, Inc.
FORM 10-Q
Table of Contents

 
 
Page
PART I. FINANCIAL STATEMENTS
 
 
 
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS



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

 
June 17, 2017
 
December 31, 2016
 
June 18, 2016
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
295,071

 
$
1,008,125

 
$
263,988

Restricted cash
67,322

 
10,793

 
2,500

Settlement receivables, net
401,758

 
641,691

 
340,925

Accounts receivable, net
262,616

 
262,672

 
226,929

Other current assets
180,925

 
131,375

 
103,061

Total current assets
1,207,692

 
2,054,656

 
937,403

Property, equipment and technology, net
174,314

 
172,381

 
165,246

Intangible assets, net
327,763

 
350,185

 
302,435

Goodwill
572,855

 
570,398

 
511,808

Deferred income taxes
361,584

 
362,302

 
349,286

Other assets
82,223

 
85,856

 
67,597

TOTAL ASSETS
$
2,726,431

 
$
3,595,778

 
$
2,333,775

 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements

1


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

 
June 17, 2017
 
December 31, 2016
 
June 18, 2016
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Settlement payables
$
622,653

 
$
1,626,827

 
$
607,463

Consumer and customer deposits
226,727

 
173,344

 
132,662

Accounts payable and accrued operating expenses
146,893

 
153,885

 
97,717

Deferred revenue
151,037

 
150,582

 
111,941

Note payable, current portion
9,890

 
9,856

 
156,091

Notes payable to Safeway
4,201

 
3,163

 
3,753

Bank line of credit

 

 
100,000

Other current liabilities
91,101

 
51,176

 
48,259

Total current liabilities
1,252,502

 
2,168,833

 
1,257,886

Deferred income taxes
28,877

 
27,887

 
20,168

Note payable
177,924

 
137,984

 
268,571

Convertible notes payable
434,855

 
429,026

 

Other liabilities
27,672

 
39,653

 
24,196

Total liabilities
1,921,830

 
2,803,383

 
1,570,821

Commitments and contingencies (see Note 9)

 

 

Stockholders’ equity:
 
 
 
 
 
Preferred stock: $0.001 par value; 10,000 shares authorized; no shares outstanding

 

 

Common stock: $0.001 par value; 210,000 shares authorized; 56,623, 55,667 and 56,289 shares outstanding, respectively
56

 
56

 
56

Additional paid-in capital
626,693

 
608,568

 
581,712

Accumulated other comprehensive loss
(34,893
)
 
(48,877
)
 
(32,065
)
Retained earnings
208,513

 
228,451

 
208,895

Total Blackhawk Network Holdings, Inc. equity
800,369

 
788,198

 
758,598

Non-controlling interests
4,232

 
4,197

 
4,356

Total stockholders’ equity
804,601

 
792,395

 
762,954

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
2,726,431

 
$
3,595,778

 
$
2,333,775

See accompanying notes to condensed consolidated financial statements

2


BLACKHAWK NETWORK HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(In thousands, except for per share amounts)
(Unaudited)
 
12 weeks ended
 
24 weeks ended
 
June 17, 2017
 
June 18, 2016
 
June 17, 2017
 
June 18, 2016
OPERATING REVENUES:
 
 
 
 
 
 
 
Commissions and fees
$
282,633

 
$
262,931

 
$
537,839

 
$
502,555

Program and other fees
107,914

 
67,419

 
208,824

 
142,861

Marketing
24,825

 
20,696

 
39,106

 
34,155

Product sales
47,774

 
40,160

 
84,613

 
78,097

Total operating revenues
463,146

 
391,206

 
870,382

 
757,668

OPERATING EXPENSES:
 
 
 
 
 
 
 
Partner distribution expense
201,525

 
191,231

 
381,001

 
363,386

Processing and services
107,680

 
76,875

 
209,952

 
150,816

Sales and marketing
77,722

 
60,511

 
140,507

 
113,849

Costs of products sold
44,541

 
38,309

 
80,734

 
74,041

General and administrative
25,563

 
22,557

 
54,588

 
46,054

Transition and acquisition
905

 
641

 
1,356

 
1,586

Amortization of acquisition intangibles
13,648

 
15,259

 
26,673

 
25,157

Change in fair value of contingent consideration
(4,037
)
 
800

 
(2,997
)
 
800

Total operating expenses
467,547

 
406,183

 
891,814

 
775,689

OPERATING INCOME (LOSS)
(4,401
)
 
(14,977
)
 
(21,432
)
 
(18,021
)
OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
Interest income and other income (expense), net
667

 
486

 
1,503

 
898

Interest expense
(7,051
)
 
(4,118
)
 
(13,994
)
 
(8,184
)
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT)
(10,785
)
 
(18,609
)
 
(33,923
)
 
(25,307
)
INCOME TAX EXPENSE (BENEFIT)
(4,591
)
 
(7,290
)
 
(14,366
)
 
(10,527
)
NET INCOME (LOSS) BEFORE ALLOCATION TO NON-CONTROLLING INTERESTS
(6,194
)
 
(11,319
)
 
(19,557
)
 
(14,780
)
Loss (income) attributable to non-controlling interests, net of tax
(157
)
 
(18
)
 
(280
)
 
(110
)
NET INCOME (LOSS) ATTRIBUTABLE TO BLACKHAWK NETWORK HOLDINGS, INC.
$
(6,351
)
 
$
(11,337
)
 
$
(19,837
)
 
$
(14,890
)
EARNINGS (LOSS) PER SHARE:
 
 
 
 
 
 
 
Basic
$
(0.11
)
 
$
(0.20
)
 
$
(0.35
)
 
$
(0.27
)
Diluted
$
(0.11
)
 
$
(0.20
)
 
$
(0.35
)
 
$
(0.27
)
Weighted average shares outstanding—basic
56,448

 
56,134

 
56,176

 
55,944

Weighted average shares outstanding—diluted
56,448

 
56,134

 
56,176

 
55,944

See accompanying notes to condensed consolidated financial statements

3


BLACKHAWK NETWORK HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
 
 
12 weeks ended
 
24 weeks ended
 
June 17, 2017
 
June 18, 2016
 
June 17, 2017
 
June 18, 2016
NET INCOME (LOSS) BEFORE ALLOCATION TO NON-CONTROLLING INTERESTS
$
(6,194
)
 
$
(11,319
)
 
$
(19,557
)
 
$
(14,780
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Currency translation adjustments
7,764

 
2,985

 
13,739

 
8,051

COMPREHENSIVE INCOME (LOSS) BEFORE ALLOCATION TO NON-CONTROLLING INTERESTS
1,570

 
(8,334
)
 
(5,818
)
 
(6,729
)
Comprehensive loss (income) attributable to non-controlling interests, net of tax
47

 
71

 
(35
)
 
(31
)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO BLACKHAWK NETWORK HOLDINGS, INC.
$
1,617

 
$
(8,263
)
 
$
(5,853
)
 
$
(6,760
)
See accompanying notes to condensed consolidated financial statements

4


BLACKHAWK NETWORK HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
24 weeks ended
 
 
June 17, 2017
 
June 18, 2016
 
OPERATING ACTIVITIES:
 
 
 
 
Net income (loss) before allocation to non-controlling interests
$
(19,557
)
 
$
(14,780
)
 
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
 
Depreciation and amortization of property, equipment and technology
25,020

 
21,684

 
Amortization of intangibles
29,160

 
27,459

 
Amortization of deferred program and contract costs
14,044

 
12,544

 
Amortization of deferred financing costs and debt discount
6,344

 
880

 
Loss on property, equipment and technology disposal/write-down
606

 
3,094

 
Employee stock-based compensation expense
16,451

 
16,572

 
Change in fair value of contingent consideration
(2,997
)
 
800

 
Other
(68
)
 
(3,011
)
 
Changes in operating assets and liabilities:
 
 
 
 
Settlement receivables
252,160

 
293,441

 
Settlement payables
(1,010,431
)
 
(1,005,723
)
 
Accounts receivable, current and long-term
(10,664
)
 
16,964

 
Other current assets
3,579

 
16,914

 
Other assets
(5,357
)
 
(2,544
)
 
Consumer and customer deposits
764

 
31,974

 
Accounts payable and accrued operating expenses
2,098

 
(33,574
)
 
Deferred revenue
4,356

 
493

 
Other current and long-term liabilities
14,670

 
(21,742
)
 
Income taxes, net
(14,467
)
 
(4,722
)
 
Net cash (used in) provided by operating activities
(694,289
)
 
(643,277
)
 
INVESTING ACTIVITIES:
 
 
 
 
Expenditures for property, equipment and technology
(30,178
)
 
(20,281
)
 
Business acquisitions, net of cash acquired
(10,260
)
 
(144,477
)
 
Investment in unconsolidated entities
(5,601
)
 

 
Change in restricted cash
(10,580
)
 
689

 
Other
(4,487
)
 
(2,500
)
 
Net cash (used in) provided by investing activities
(61,106
)
 
(166,569
)
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements

5


BLACKHAWK NETWORK HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
(Unaudited)
 
24 weeks ended
 
 
June 17, 2017
 
June 18, 2016
 
FINANCING ACTIVITIES:
 
 
 
 
Payments for acquisition liability
(5,503
)
 

 
Repayment of debt assumed in business acquisitions
(300
)
 
(8,964
)
 
Proceeds from issuance of note payable
50,000

 
100,000

 
Repayment of note payable
(10,000
)
 
(37,500
)
 
Payments of financing costs
(619
)
 

 
Borrowings under revolving bank line of credit
1,198,597

 
1,502,675

 
Repayments on revolving bank line of credit
(1,198,597
)
 
(1,402,675
)
 
Repayment on notes payable to Safeway
(254
)
 
(376
)
 
Proceeds from issuance of common stock from exercise of employee stock options and employee stock purchase plans
10,371

 
3,452

 
Other stock-based compensation related
(9,705
)
 
(2,002
)
 
Net cash (used in) provided by financing activities
33,990

 
154,610

 
Effect of exchange rate changes on cash and cash equivalents
8,351

 
4,648

 
Decrease in cash and cash equivalents
(713,054
)
 
(650,588
)
 
Cash and cash equivalents—beginning of period
1,008,125

 
914,576

 
Cash and cash equivalents—end of period
$
295,071

 
$
263,988

 
 
 
 
 
 
NONCASH FINANCING AND INVESTING ACTIVITIES:
 
 
 
 
Financing of business acquisition with contingent consideration
$
1,640

 
$
20,100

 
See accompanying notes to condensed consolidated financial statements

6


BLACKHAWK NETWORK HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The Company and Significant Accounting Policies
The Company
Blackhawk Network Holdings, Inc., together with its subsidiaries (“we”, “us”, “our”, the “Company”), is a leading prepaid payment network utilizing proprietary technology to offer consumers and businesses a broad selection of prepaid cards in physical and electronic forms, as well as complementary prepaid products, payment services and incentives solutions. We currently offer our products and/or solutions directly or through commercial relationships in the United States and 25 other countries and can deliver solutions in over 100 countries. Our product offerings include single-use gift cards; loyalty, incentive and reward products and services; prepaid telecom products and prepaid financial services products, including general purpose reloadable (“GPR”) cards, and our reload network (collectively, “prepaid products”). We offer gift cards from leading consumer brands (known as “closed loop”) as well as branded gift and incentive cards from leading payment network card associations such as American Express, Discover, MasterCard and Visa (known as “open loop”) and prepaid telecom products offered by prepaid wireless telecom carriers. We also distribute GPR cards and operate a proprietary reload network named Reloadit, which allows consumers to reload funds onto their previously purchased GPR cards. We distribute these prepaid products across multiple high-traffic channels such as grocery, convenience, specialty and online retailers (referred to as “retail distribution partners”) in the Americas, Europe, Africa, Australia and Asia and provide these prepaid products and related services to business clients for their loyalty, incentive and reward programs.
Basis of Presentation
The accompanying condensed consolidated financial statements of Blackhawk Network Holdings, Inc. are unaudited. We have prepared our unaudited interim condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. We have condensed or omitted certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP pursuant to such rules and regulations. Accordingly, our interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K, filed with the SEC on February 27, 2017 (the “Annual Report”). We have prepared our condensed consolidated financial statements on the same basis as our annual audited consolidated financial statements and, in the opinion of management, have reflected all adjustments, which include only normal recurring adjustments, necessary to present fairly our financial position and results of operations for the interim periods presented. Our results for the interim periods are not necessarily reflective of the results to be expected for the year ending December 30, 2017 or for any other interim period or other future year. Our condensed consolidated balance sheet as of December 31, 2016, included herein was derived from our audited consolidated financial statements as of that date but does not include all disclosures required by GAAP for annual financial statements, including notes to the financial statements.
Seasonality
For our retail business, a significant portion of gift card sales occurs in late December each year during the holiday selling season. As a result, we earn a significant portion of our revenues, net income and cash flows during the fourth quarter of each year and remit the majority of the cash, less commissions, to our content providers in January of the following year. The timing of our fiscal year-end, December holiday sales and the related January cash settlement with content providers significantly increases our Cash and cash equivalents, Settlement receivables and Settlement payables balances at the end of each fiscal year relative to normal daily balances. The cash settlement with our content providers in January accounts for the majority of the use of cash from operating activities in our condensed consolidated statements of cash flows during our first three fiscal quarters. We also experience an increase in revenues, net income and cash flows during the second quarter of each year, which we primarily attribute to the Mother’s Day, Father’s Day and graduation gifting season and the Easter holiday. Depending on when the Easter holiday occurs, the associated increase is in either the first or second quarter. As a result, quarterly financial results are not necessarily reflective of the results to be expected for the year or any other interim or future period. Seasonality also impacts our incentives businesses, but such impact is smaller in comparison to our retail business.



7


Recently Issued or Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (Topic 606), which along with amendments issued in 2015 and 2016, will replace nearly all current U.S. GAAP guidance on this topic with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. Under the new standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This new guidance is to be applied retrospectively either to each reporting period presented (full retrospective method) or with the cumulative effect of initially applying the guidance at the date of initial application for reporting periods beginning after December 15, 2017. Early adoption is not permitted. We will adopt this standard using the full retrospective method in the first quarter of fiscal 2018, and we are currently evaluating the impact of this guidance on our condensed financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the existing two-step guidance for goodwill impairment testing by eliminating the second step resulting in a write-down to goodwill equal to the initial amount of impairment determined in step one. The ASU is to be applied prospectively for reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. We have early-adopted this standard in the first quarter of 2017, however, it has no impact on our financial statements unless we determine in the future that goodwill is impaired at one of our reporting units.
Significant Accounting Policies
Except for goodwill as stated above, there have been no material changes to our significant accounting policies, as compared to the significant accounting policies described in the audited consolidated financial statements and related notes included in the Annual Report.

2. Business Acquisitions
2017 Acquisition
During the first quarter of 2017, we completed an acquisition of a rebates and incentives business for total consideration of approximately $18.0 million, which includes $16.4 million cash on hand and approximately $1.6 million related to contingent consideration, which is a cash payment of up to $2.0 million based on the performance of the acquired business through December 31, 2017. In aggregate, $6.1 million cash was acquired, and based on our initial estimate of the purchase price allocation, $7.8 million was attributed to intangible assets, $9.9 million was attributed to goodwill, and $5.8 million was attributed to net tangible liabilities acquired.
For the intangible assets acquired, customer relationships have an average useful life of 7 years.
We expect to deduct goodwill and identifiable technology and intangible assets for tax purposes, a portion of which will commence upon settlement of contingent consideration and contingent liabilities.
We have not presented separate results of operations since closing or combined pro forma financial information of us and the acquisition since the beginning of fiscal 2016, as results of operations for the acquisition are immaterial.
2016 Acquisitions
During the second quarter of 2017, we recorded a measurement period adjustment for The Grass Roots Group Holdings Limited and its subsidiaries (collectively, “Grass Roots”), which increased the purchase price by $0.8 million, increased accounts receivables by $0.4 million, decreased consumer and customer deposits by $1.8 million and decreased goodwill by $1.4 million. We also recorded a measurement period adjustment for Spafinder Wellness, Inc. and its subsidiaries (collectively, “Spafinder”), which increased goodwill by $0.3 million and decreased inventory by $0.3 million. The measurement periods for IMShopping, Inc. and its subsidiary (collectively, “NimbleCommerce”) and 888extramoney.com LLC (“Extrameasures”) were closed in the first and second quarter of 2017, respectively.
The measurement period for our acquisitions of Grass Roots, Spafinder and Samba Days Experience Group Ltd. and certain of its subsidiaries remains open with respect to intangibles and deferred taxes.

8



3. Financing
Credit Agreement
In March 2017, we repaid $10.0 million of the term loan outstanding under our Credit Agreement, as amended and restated (the “Restated Credit Agreement”).
On April 20, 2017, we borrowed an additional $50.0 million of term loan under the Restated Credit Agreement. The terms of the new term loan are substantially similar to the outstanding term loan.
On April 25, 2017, we entered into an amendment to the Restated Credit Agreement to extend the term loan commitments provided by the lenders under our Restated Credit Agreement to January 12, 2018 and made certain modifications to the financial and other covenants to add operating flexibility, including modification of the leverage covenant and increasing the dollar limitation on dividends, stock repurchases and other restricted payments under certain conditions.
The following table presents the amounts due by maturity date of our term loan and convertible notes as of June 17, 2017 (in thousands):
 
 June 17, 2017
2018
$
10,000

2019
10,000

2020
20,000

2021
150,000

2022
500,000

Total long-term debt
$
690,000

As a result of the covenants in our Restated Credit Agreement which require us to maintain certain leverage ratios of total debt to adjusted EBITDA (as defined in the Restated Credit Agreement), and depending on our levels of adjusted EBITDA, we are limited in our ability to incur additional indebtedness either under the Restated Credit Agreement or through other debt facilities. These limitations also affect the amount of capital we can allocate to acquisitions, internal capital developments and capital returned to stockholders.

4. Fair Value Measurements
We measure certain assets and liabilities at fair value on a recurring basis. The table below summarizes the fair values of these assets and liabilities as of June 17, 2017, December 31, 2016 and June 18, 2016 (in thousands):
 
June 17, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
Money market mutual funds
$
4,092

 
$

 
$

 
$
4,092

Liabilities
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$
16,892

 
$
16,892


9


 
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
Money market mutual funds
$
300,015

 
$

 
$

 
$
300,015

Liabilities
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$
23,752

 
$
23,752

 
June 18, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
Money market mutual funds
$
11,100

 
$

 
$

 
$
11,100

Liabilities
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$
20,900

 
$
20,900

Level 1— Unadjusted quoted prices in active markets for identical assets or liabilities. Level 1 investments include money market mutual funds.
Level 2— Inputs other than quoted prices included in Level 1 that are either directly or indirectly observable.
During the 24 weeks ended June 17, 2017, there were no transfers between levels.
Level 3— Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the inputs that market participants would use in pricing. Level 3 includes the estimated fair value of our contingent consideration liabilities.
Term loan —As of June 17, 2017, using Level 2 inputs, we estimate the fair value of our term loan (classified as Note payable on the balance sheet) to be approximately $190.0 million.
Convertible notes payable—As of June 17, 2017, using Level 2 inputs, we estimate the fair value of our convertible notes payable to be approximately $541.9 million.
Contingent consideration—We estimate the fair value of the contingent consideration based on our estimates of the probability of achieving the relevant targets and discount rates reflecting the risk of meeting these targets. The changes in fair value of contingent consideration for the 24 weeks ended June 17, 2017 and June 18, 2016 are as follows (in thousands):
 
24 weeks ended
 
June 17, 2017
 
June 18, 2016
Balance, beginning of period
$
23,752

 
$

Addition from acquisition (see Note 2—Business Acquisitions)
1,640

 
20,100

Change in fair value of contingent consideration
(2,997
)
 
800

Settlement
(5,503
)
 

Balance, end of period
$
16,892


$
20,900

We present the change in the fair value of contingent consideration in Change in fair value of contingent consideration and as a noncash adjustment to net income in our condensed consolidated statements of cash flows. A significant increase (decrease) in our estimates of the amounts payable for and probability of achieving the relevant targets or a significant decrease (increase) in the discount rate could materially increase (decrease) the estimated fair value of contingent consideration.
The issuance and increase in fair value of contingent consideration during 2016 was related to our acquisition of Extrameasures. During the 24 weeks ended June 17, 2017, we paid out $5.5 million for achieving relevant targets during the first earn-out year, and we estimated the fair value of the remaining contingent consideration based on our estimates of the amounts payable for and probability of achieving the relevant targets and a discount rate of 17%.

10



5. Consolidated Financial Statement Details
The following tables represent the components of Other current assets, Other assets, Other current liabilities and Other liabilities as of June 17, 2017, December 31, 2016 and June 18, 2016 consisted of the following (in thousands):
 
June 17, 2017
 
December 31, 2016
 
June 18, 2016
Other current assets:
 
 
 
 
 
Inventory
$
42,616

 
$
43,950

 
$
34,154

Deferred expenses
18,931

 
22,148

 
12,656

Income tax receivables
30,134

 
13,599

 
25,639

Other
48,874

 
51,678

 
30,612

Assets held for sale
40,370

 

 

Total other current assets
$
180,925

 
$
131,375

 
$
103,061

Other assets:
 
 
 
 
 
Deferred program and contract costs
$
39,097

 
$
48,066

 
$
43,527

Other receivables
1,622

 
2,713

 
2,810

Income taxes receivable
2,270

 
2,358

 

Deferred financing costs
2,756

 
2,688

 
1,675

Other
36,478

 
30,031

 
19,585

Total other assets
$
82,223

 
$
85,856

 
$
67,597

Other current liabilities:
 
 
 
 
 
Payroll and related liabilities
$
28,309

 
$
24,944

 
$
24,336

Income taxes payable
5,000

 
4,199

 
2,333

Acquisition liability
7,352

 
6,672

 
10,850

Other payables and accrued liabilities
11,582

 
15,361

 
10,740

Liabilities held for sale
38,858

 

 

Total other current liabilities
$
91,101

 
$
51,176

 
$
48,259

Other liabilities:
 
 
 
 
 
Acquisition liability
$
9,540

 
$
17,080

 
$
10,050

Income taxes payable
7,130

 
6,957

 
6,186

Deferred income and other liabilities
11,002

 
15,616

 
7,960

Total other liabilities
$
27,672

 
$
39,653

 
$
24,196


Assets held for sale
During the first quarter of 2017, management approved a plan to sell all assets and liabilities related to Grass Roots’ Meetings & Events (“M&E”) business. It is probable that such sale will occur within one year. As a result, beginning from the time the plan was approved, each of the relevant asset and liability balances will be accounted for as held for sale and measured at the lower of its carrying value or fair value less cost to sell. Based on the purchase price allocation performed in the fourth quarter of 2016, we believe that the carrying value of all the relevant assets and liabilities does not exceed fair value less cost to sell.

11


The following table presents the aggregate carrying amounts of the major classes of assets and liabilities related to the M&E business as of June 17, 2017 (in thousands):
 
June 17, 2017
Accounts receivable, net
$
16,174

Other current assets
4,657

Property, equipment and technology, net
927

Intangible assets, net
5,607

Goodwill
11,924

Deferred income taxes
1,081

Total assets held for sale
$
40,370

 
 
Settlement payables
$
7,838

Consumer and customer deposits
1,754

Accounts payable and accrued operating expenses
8,454

Deferred revenue
4,695

Other current liabilities
16,004

Deferred income taxes
113

Total liabilities held for sale
$
38,858

During the first two quarters of 2017, the M&E business recorded pre-tax income of $0.6 million during the period it was accounted for as an asset held for sale.
6. Goodwill

We have assigned goodwill to our U.S. Retail, Incentives & Rewards and International segments. To date, we have not recorded any impairment charges against or disposed of any reporting units with goodwill. During the first quarter of 2017, as a result of changes in reporting financial results to our Chief Operating Decision Maker (“CODM”), we concluded that we would report the international incentives businesses within the International reportable segment. Accordingly, we re-allocated a portion of the goodwill from the historical Incentives & Rewards segment to the International segment based on their relative fair values. As we continue to develop our e-commerce strategy, we also re-allocated a portion of the e-commerce goodwill from U.S. Retail to Incentives & Rewards to align with the way our business is managed. A summary of changes in goodwill during the 24 weeks ended June 17, 2017 is as follows (in thousands):
 
June 17, 2017
 
U.S. Retail
 
Incentives & Rewards
 
International
 
Total
Balance, beginning of period
$
99,685

 
$
366,508

 
$
104,205

 
$
570,398

Re-allocation of goodwill to International

 
(7,152
)
 
7,152

 

Re-allocation of e-commerce goodwill
(10,505
)
 
10,505

 

 

Acquisition (see Note 2—Business Acquisitions)

 
9,919

 

 
9,919

Measurement period of adjustments for 2016 acquisitions
338

 

 
(1,384
)
 
(1,046
)
Asset held for sale (see Note 5—Consolidated Financial Statement Details)

 

 
(11,924
)
 
(11,924
)
Foreign currency translation adjustments

 
386

 
5,122

 
5,508

Balance, end of period
$
89,518

 
$
380,166

 
$
103,171

 
$
572,855


7. Stock-Based Compensation

During the 24 weeks ended June 17, 2017, our Board of Directors granted 992,669 restricted stock units and 200,700 performance stock units.

12


The following table presents total stock-based compensation expense according to the income statement line in our condensed consolidated statements of income (loss) for the 24 weeks ended June 17, 2017 and June 18, 2016 (in thousands):
 
12 weeks ended
 
24 weeks ended
 
June 17, 2017
 
June 18, 2016
 
June 17, 2017
 
June 18, 2016
Processing and services
$
1,798

 
$
1,522

 
$
3,500

 
$
2,964

Sales and marketing
2,884

 
3,027

 
5,696

 
5,841

Cost of products sold
4

 
42

 
21

 
58

General and administrative
3,364

 
3,981

 
7,234

 
7,709

Total stock-based compensation expense
$
8,050

 
$
8,572

 
$
16,451

 
$
16,572


8. Income Taxes
Our effective tax rates were 42.6% and 39.2% for the 12 weeks ended June 17, 2017 and June 18, 2016, respectively, and 42.3% and 41.6% for the 24 weeks ended June 17, 2017 and June 18, 2016, respectively. The effective rate for the 12 weeks and 24 weeks ended June 17, 2017 was higher primarily due to excess tax benefits of employee stock-based compensation.

9. Commitments and Contingencies
Contingencies
From time to time, we enter into contracts containing provisions that require us to indemnify various parties against certain potential claims from third parties. Under contracts with certain issuing banks, we are responsible to the banks for any unrecovered overdrafts on cardholders’ accounts. Under contracts with certain content providers, retail distribution partners and issuing banks, we are responsible for potential losses resulting from certain claims from third parties. Because the indemnity amounts associated with these agreements are not explicitly stated, the maximum amount of the obligation cannot be reasonably estimated. Historically, we have paid immaterial amounts pursuant to these indemnification provisions.
We are subject to audits related to various indirect taxes, including, but not limited to, sales and use taxes, value-added tax, and goods and services tax, in various foreign and state jurisdictions. We evaluate our exposure related to these audits and potential audits and do not believe that it is probable that any audit would hold us liable for any material amounts due.
Legal Matters
There are various claims and lawsuits arising in the normal course of business pending against us, including the matters described below, some of which seek damages and other relief which, if granted, may require future cash expenditures. Management does not believe that it is probable that the resolution of these matters would result in any liability that would materially affect our results of operations or financial condition.
On March 30, 2015, Greg Haney in his capacity as Seller Representative for CardLab, Inc. filed a lawsuit against us in the Delaware Chancery Court (CardLab, Inc. v. Blackhawk Network Holdings, Inc., Case No. 10851). The complaint generally alleges that we failed to disclose material information relating to a potential earn-out payment in connection with our acquisition of CardLab, Inc. in 2014. We believe that the suit is without merit, and are vigorously defending ourselves against these claims. On June 8, 2015, we filed a motion to dismiss the complaint. On June 22, 2015, the plaintiff filed an amended complaint. On July 7, 2015, we filed a motion to dismiss the case in its entirety. On February 26, 2016, the Court granted the motion to dismiss in part, dismissing two claims of the amended complaint. On March 25, 2016 we filed our answer denying the remaining claims and a counterclaim for attorneys’ fees pursuant to the merger agreement between the parties. On June 22, 2016, the plaintiff filed a motion to dismiss our counterclaim for indemnification. On July 22, 2016, we filed an amended counterclaim in response. On August 5, 2016, the plaintiff filed a reply. On May 11, 2017, the parties updated the Court regarding the status of the case. We believe the likelihood of loss is remote.
In addition, we transact business in non-U.S. markets and may, from time to time, be subject to disputes and tax audits by foreign tax authorities related to indirect taxes typically on commissions or fees we receive from non-resident content providers. After the application of third party indemnities, our present exposure is approximately $4.9 million, primarily in a single jurisdiction. If we were to be assessed for this exposure, we believe it is probable that we will prevail.

13



10. Segment Reporting
Our three reportable segments are U.S. Retail, Incentives & Rewards and International. During the first quarter of 2017, as a result of changes in reporting financial results to our CODM, we concluded that we would report the international incentives businesses within the International reportable segment. We also determined that it would be appropriate to allocate all costs that have been previously reported within Corporate and Unallocated: i) account management and marketing personnel, ii) the substantial majority of our technology personnel and related depreciation and amortization of technology and related hardware, iii) accounting, finance, legal, human resources and other administrative functions and iv) noncash charges including amortization of acquisition intangibles, stock-based compensation and change in fair value of contingent consideration, to the respective reportable segments.
We do not assess performance based on assets and do not provide information on the assets of our reportable segments to our CODM. The key metrics used by our CODM to assess segment performance include Operating revenues, Operating revenues, net of Partner distribution expense and segment profit.
The following tables present the key metrics used by our CODM for the evaluation of segment performance, including certain significant noncash charges (consisting of certain depreciation and amortization of property, equipment and technology and distribution partner stock-based compensation expense) which have been deducted from the segment profit amounts shown below, and reconciliations of these amounts to our condensed consolidated financial statements (in thousands):
 
12 weeks ended
 
June 17, 2017
 
U.S. Retail
 
Incentives & Rewards
 
International
 
Consolidated
Total operating revenues
$
237,705

 
$
80,702

 
$
144,739

 
$
463,146

Partner distribution expense
124,763

 
6,650

 
70,112

 
201,525

Operating revenues, net of Partner distribution expense
112,942

 
74,052

 
74,627

 
261,621

Other operating expenses
111,697

 
76,325

 
78,000

 
266,022

Segment profit (loss) / Operating income (loss)
$
1,245

 
$
(2,273
)
 
$
(3,373
)
 
$
(4,401
)
Other income (expense)
 
 
 
 
 
 
(6,384
)
Income (loss) before income tax expense
 
 
 
 
 
 
$
(10,785
)
Noncash charges
$
13,660

 
$
11,869

 
$
8,696

 


 
12 weeks ended
 
June 18, 2016
 
U.S. Retail
 
Incentives & Rewards
 
International
 
Consolidated
Total operating revenues
$
237,608

 
$
61,119

 
$
92,479

 
$
391,206

Partner distribution expense
120,795

 
5,218

 
65,218

 
191,231

Operating revenues, net of Partner distribution expense
116,813

 
55,901

 
27,261

 
199,975

Other operating expenses
112,701

 
68,678

 
33,573

 
214,952

Segment profit (loss) / Operating income (loss)
$
4,112

 
$
(12,777
)
 
$
(6,312
)
 
$
(14,977
)
Other income (expense)
 
 
 
 
 
 
(3,632
)
Income (loss) before income tax expense
 
 
 
 
 
 
$
(18,609
)
Noncash charges
$
13,727

 
$
22,041

 
$
5,595

 
 





14


 
24 weeks ended
 
June 17, 2017
 
U.S. Retail
 
Incentives & Rewards
 
International
 
Consolidated
Total operating revenues
$
445,343

 
$
143,927

 
$
281,112

 
$
870,382

Partner distribution expense
226,476

 
10,736

 
143,789

 
381,001

Operating revenues, net of Partner distribution expense
218,867

 
133,191

 
137,323

 
489,381

Other operating expenses
220,610

 
142,748

 
147,455

 
510,813

Segment profit (loss) / Operating income (loss)
$
(1,743
)
 
$
(9,557
)
 
$
(10,132
)
 
$
(21,432
)
Other income (expense)

 

 

 
(12,491
)
Income (loss) before income tax expense
 
 
 
 
 
 
$
(33,923
)
Noncash charges
$
27,277

 
$
27,699

 
$
16,524

 
 
 
24 weeks ended
 
June 18, 2016
 
U.S. Retail
 
Incentives & Rewards
 
International
 
Consolidated
Total operating revenues
$
453,104

 
$
120,773

 
$
183,791

 
$
757,668

Partner distribution expense
226,354

 
8,049

 
128,983

 
363,386

Operating revenues, net of Partner distribution expense
226,750

 
112,724

 
54,808

 
394,282

Other operating expenses
214,444

 
130,141

 
67,718

 
412,303

Segment profit (loss) / Operating income (loss)
$
12,306

 
$
(17,417
)
 
$
(12,910
)
 
$
(18,021
)
Other income (expense)

 

 

 
(7,286
)
Income (loss) before income tax expense
 
 
 
 
 
 
$
(25,307
)
Noncash charges
$
25,243

 
$
38,301

 
$
9,865

 
 


15


11. Earnings Per Share
The following table provides reconciliations of net income (loss) and shares used in calculating basic earnings (loss) per share (“EPS”) to those used in calculating diluted EPS (in thousands, except per share amounts):
 
12 weeks ended
 
June 17, 2017
 
June 18, 2016
 
Basic
 
Diluted
 
Basic
 
Diluted
Net income (loss) attributable to Blackhawk Network Holdings, Inc.
$
(6,351
)
 
$
(6,351
)
 
$
(11,337
)
 
$
(11,337
)
Distributed and undistributed earnings allocated to participating securities

 

 

 

Net income (loss) attributable to common stockholders
$
(6,351
)
 
$
(6,351
)
 
$
(11,337
)
 
$
(11,337
)
Weighted-average common shares outstanding
56,448

 
56,448

 
56,134

 
56,134

Common share equivalents
 
 

 


 

Weighted-average shares outstanding
 
 
56,448

 
 
 
56,134

Earnings (loss) per share
$
(0.11
)
 
$
(0.11
)
 
$
(0.20
)
 
$
(0.20
)
 
24 weeks ended
 
June 17, 2017
 
June 18, 2016
 
Basic
 
Diluted
 
Basic
 
Diluted
Net income (loss) attributable to Blackhawk Network Holdings, Inc.
$
(19,837
)
 
$
(19,837
)
 
$
(14,890
)
 
$
(14,890
)
Distributed and undistributed earnings allocated to participating securities

 

 
(15
)
 
(15
)
Net income (loss) attributable to common stockholders
$
(19,837
)
 
$
(19,837
)
 
$
(14,905
)
 
$
(14,905
)
Weighted-average common shares outstanding
56,176

 
56,176

 
55,944

 
55,944

Common share equivalents
 
 

 
 
 

Weighted-average shares outstanding
 
 
56,176

 
 
 
55,944

Earnings (loss) per share
$
(0.35
)
 
$
(0.35
)
 
$
(0.27
)
 
$
(0.27
)
The weighted-average common shares outstanding for diluted EPS for the 12 weeks ended June 17, 2017 and June 18, 2016, excluded approximately 5,046,000 and 5,694,000, respectively, and for the 24 weeks ended June 17, 2017 and June 18, 2016, excluded approximately 5,177,000 and 5,407,000, respectively, of total potential common stock outstanding because the effect would have been anti-dilutive.






16


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q (the Quarterly Report) and our Annual Report filed on Form 10-K filed with the Securities and Exchange Commission (the “SEC”), on February 27, 2017 (the Annual Report). This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. You should review the “Risk Factors” of our Annual Report and “Special Note regarding Forward-Looking Statements” section and the “Risk Factors” section of this Quarterly Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Special Note regarding Forward Looking Statements
This Quarterly Report contains 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,” “intends,” “forecasts,” “can,” “could,” “may,” “anticipates,” “estimates,” “plans,” “projects,” “seeks,” “should,” “targets,” “will,” “would,” “outlook,” “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 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, fail to maintain existing relationships with our 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,
changes in consumer behavior away from our distribution partners or our products resulting from limits or controls implemented by our distribution partners during their transition to comply with Europay, MasterCard and Visa (“EMV”) requirements,
our ability to successfully integrate our acquisitions,
our ability to generate adequate taxable income to enable us to fully utilize our deferred income tax assets,
changes in applicable tax law that preclude us from fully utilizing our deferred income tax assets,
the requirement that we comply with applicable laws and regulations, including increasingly stringent anti-money laundering rules and regulations, and
other risks and uncertainties described in our reports and filings with the SEC, including the risks and uncertainties set forth in Item 1A under the heading Risk Factors in our Annual Report, this Quarterly Report and other subsequent periodic reports we file with the SEC.
Furthermore, such forward-looking statements speak only as of the date of this Quarterly Report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

17


Quarterly Results of Operations and Seasonality
For our retail business, a significant portion of gift card sales occurs in late December each year during the holiday selling season. As a result, we earn a significant portion of our revenues, net income and cash flows during the fourth quarter of each year and remit the majority of the cash, less commissions, to our content providers in January of the following year. The timing of our fiscal year-end, December holiday sales and the related January cash settlement with content providers significantly increases our Cash and cash equivalents, Settlement receivables and Settlement payables balances at the end of each fiscal year relative to normal daily balances. The cash settlement with our content providers in January accounts for the majority of the use of cash from operating activities in our condensed consolidated statements of cash flows during our first three fiscal quarters. We also experience an increase in revenues, net income and cash flows during the second quarter of each year, which we primarily attribute to the Mother’s Day, Father’s Day and graduation gifting season and the Easter holiday. Depending on when the Easter holiday occurs, the associated increase is in either the first or second quarter. As a result, quarterly financial results are not necessarily reflective of the results to be expected for the year or any other interim or future period. Seasonality also impacts our incentives businesses, but such impact is smaller in comparison to our retail business.


18


Key Operating Statistics
The following table sets forth key operating statistics that directly affect our financial performance, a reconciliation of Commissions and fees and Program and other fees to Prepaid and processing revenues and a reconciliation of Total operating revenues to Adjusted operating revenues for the 12 and 24 weeks ended June 17, 2017 and June 18, 2016:
 
12 weeks ended
 
24 weeks ended
 
June 17, 2017
 
June 18, 2016
 
June 17, 2017
 
June 18, 2016
 
 
 
 
 
 
 
 
 
(in thousands, except percentages and per share amounts)
Prepaid and processing revenues
$
390,547

 
$
330,350

 
$
746,663

 
$
645,416

Partner distribution expense as a % of prepaid and processing revenues
51.6
%
 
57.9
%
 
51.0
%
 
56.3
%
Prepaid and processing revenues:
 
 
 
 
 
 
 
Commissions and fees
$
282,633

 
$
262,931

 
$
537,839

 
$
502,555

Program and other fees
107,914

 
67,419

 
208,824

 
142,861

Prepaid and processing revenues
$
390,547

 
$
330,350

 
$
746,663

 
$
645,416

Total operating revenues
$
463,146

 
$
391,206

 
$
870,382

 
$
757,668

Revenue adjustment from purchase accounting (2)
1,505

 
4,439

 
3,489

 
8,209

Marketing revenue and other pass-through revenue
(27,653
)
 
(20,696
)
 
(44,633
)
 
(34,155
)
Partner distribution expense
(201,525
)
 
(191,231
)
 
(381,001
)
 
(363,386
)
Adjusted operating revenues (1)
$
235,473

 
$
183,718

 
$
448,237

 
$
368,336


(1)
Our Adjusted operating revenues is a non-GAAP financial measure. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position or cash flow that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. This measure, however, should be considered in addition to, and not as a substitute for or superior to, operating revenues, operating income, operating margin, cash flows, or other measures of the financial performance prepared in accordance with GAAP.
(2)
Impact on revenues recognized resulting from the step down in basis of deferred revenue from its carrying value to fair value in a business combination at the acquisition date.
Prepaid and Processing Revenues—Represents the total amount of Commissions and fees and Program and other fees recognized during the period. Our prepaid product revenues vary among our various product offerings: content provider commissions from closed loop gift and prepaid telecom cards; program management fees, interchange and other fees included in Program and other fees in addition to the consumer and client purchase fees included in Commissions and fees from open loop gift cards and incentive and reward products and services; for our employee engagement businesses, the gross billings are recorded as deferred revenue and recognized as the products are delivered or services are rendered, and we only include the portion of revenue related to software in Program and other fees in this metric, as we present revenue from the redemption of employee rewards in Product sales.
Partner Distribution Expense as a Percentage of Prepaid and Processing Revenues—Represents partner distribution expense divided by Prepaid and processing revenues during the period. Partner Distribution Expense represents the expense recognized for the portion of content provider commissions and purchase or load fees shared with our retail distribution partners (known as distribution partner commissions), as well as other compensation we pay our retail business partners and certain business clients, including certain program development payments to our retail distribution partners, compensation for the distribution of our open loop products and expense recognized for equity awards issued to certain retail distribution partners. We present this expense as a percentage of prepaid and processing revenues to present the overall portion of our revenues from the sale of our prepaid products and services that we share with our retail distribution partners and business clients. The substantial majority of this expense is distribution partner commissions which are based on a percentage of the gross content provider commissions and consumer purchase fees. These percentages are individually negotiated with our retail distribution partners and are independent of the commission rates negotiated between us and our content providers. Partner distribution expense percentage is affected by changes in the proportion of sales i) among our various products (as we share significantly lower amounts of revenues included in Program and other fees generated by our open loop gift, open loop incentive and financial services products), ii) among our various regions (as commission share percentages differ from region

19


to region, particularly those with sub-distributor relationships) and iii) among retail distribution partners (as the commission share percentage is individually negotiated with each retail distribution partner).
Adjusted Operating Revenues—We regard Adjusted operating revenues as a useful measure of operational and financial performance of the business. Adjusted operating revenues are prepared and presented to offset the distribution commissions paid and other compensation to our distribution partners and business clients, to remove marketing revenues and other pass-through revenues which have offsetting marketing expenses included in Sales and marketing expense and to remove the impact of the step down in basis of deferred revenue from its book value to its fair value in purchase accounting. Our Adjusted operating revenues may not be comparable to similarly titled measures of other organizations because other organizations may not calculate these measures in the same manner as we do. You are encouraged to evaluate our adjustments and the reasons we consider them appropriate.
We believe Adjusted operating revenues is useful to evaluate our operating performance for the following reasons:
adjusting our operating revenues for distribution commissions paid and other compensation to our retail distribution partners and business clients is useful to understanding our operating margin;
adjusting our operating revenues for marketing and other pass-through revenue, which has offsetting expense, is useful for understanding our operating margin;
in a business combination, a company records an adjustment to reduce the carrying value of deferred revenue to its fair value and reduces the company’s revenues from what it would have recorded otherwise, and as such we do not believe is indicative of our core operating performance.
Transaction Dollar Volume—For our incentives and rewards businesses, transaction dollar volume generally do not correlate with the amount of revenues recognized in the same period. Due to the growth of our incentives businesses worldwide, we no longer monitor this metric at the reportable segment level for Incentives & Rewards and International. Transaction dollar volume remains a key operating statistic for our U.S. Retail segment as discussed in our Results of Operations.

20


Results of Operations
Comparison of the 12 and 24 Weeks ended June 17, 2017 and June 18, 2016
The fiscal periods presented in the accompanying tables below and throughout this Results of Operations section consist of the 12-week and 24-week periods ended June 17, 2017 and June 18, 2016 (the second quarter of 2017 and second quarter of 2016, respectively).
The following tables set forth the revenue and expense amounts as a percentage of total operating revenues by the line items in our condensed consolidated statements of income (loss) for the second quarter of 2017 and second quarter of 2016.
 
12 weeks ended June 17, 2017
 
% of Total Operating Revenues
 
12 weeks ended June 18, 2016
 
% of Total Operating Revenues
 
(in thousands, except percentages)
OPERATING REVENUES:
 
 
 
 
 
 
 
Commissions and fees
$
282,633

 
61.0
 %
 
$
262,931

 
67.2
 %
Program and other fees
107,914

 
23.3
 %
 
67,419

 
17.2
 %
Marketing
24,825

 
5.4
 %
 
20,696

 
5.3
 %
Product sales
47,774

 
10.3
 %
 
40,160

 
10.3
 %
Total operating revenues
463,146

 
100.0
 %
 
391,206

 
100.0
 %
OPERATING EXPENSES:
 
 
 
 
 
 
 
Partner distribution expense
201,525

 
43.5
 %
 
191,231

 
48.9
 %
Processing and services
107,680

 
23.3
 %
 
76,875

 
19.6
 %
Sales and marketing
77,722

 
16.8
 %
 
60,511

 
15.5
 %
Costs of products sold
44,541

 
9.6
 %
 
38,309

 
9.8
 %
General and administrative
25,563

 
5.5
 %
 
22,557

 
5.7
 %
Transition and acquisition
905

 
0.2
 %
 
641

 
0.2
 %
Amortization of acquisition intangibles
13,648

 
3.0
 %
 
15,259

 
3.9
 %
Change in fair value of contingent consideration
(4,037
)
 
(0.9
)%
 
800

 
0.2
 %
Total operating expenses
467,547

 
101.0
 %
 
406,183

 
103.8
 %
OPERATING INCOME (LOSS)
(4,401
)
 
(1.0
)%
 
(14,977
)
 
(3.8
)%
OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
Interest income and other income (expense), net
667

 
0.2
 %
 
486

 
0.1
 %
Interest expense
(7,051
)
 
(1.5
)%
 
(4,118
)
 
(1.1
)%
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT)
(10,785
)
 
(2.3
)%
 
(18,609
)
 
(4.8
)%
INCOME TAX EXPENSE (BENEFIT)
(4,591
)
 
(1.0
)%
 
(7,290
)
 
(1.9
)%
NET INCOME (LOSS) BEFORE ALLOCATION TO NON-CONTROLLING INTERESTS
(6,194
)
 
(1.3
)%
 
(11,319
)
 
(2.9
)%
Loss (income) attributable to non-controlling interests, net of tax
(157
)
 
(0.1
)%
 
(18
)
 
 %
NET INCOME (LOSS) ATTRIBUTABLE TO BLACKHAWK NETWORK HOLDINGS, INC.
$
(6,351
)
 
(1.4
)%
 
$
(11,337
)
 
(2.9
)%

21


 
24 weeks ended June 17, 2017
 
% of Total Operating Revenues
 
24 weeks ended June 18, 2016
 
% of Total Operating Revenues
 
(in thousands, except percentages)
OPERATING REVENUES:
 
 
 
 
 
 
 
Commissions and fees
$
537,839

 
61.8
 %
 
$
502,555

 
66.3
 %
Program and other fees
208,824

 
24.0
 %
 
142,861

 
18.9
 %
Marketing
39,106

 
4.5
 %
 
34,155

 
4.5
 %
Product sales
84,613

 
9.7
 %
 
78,097

 
10.3
 %
Total operating revenues
870,382

 
100.0
 %
 
757,668

 
100.0
 %
OPERATING EXPENSES:
 
 
 
 
 
 
 
Partner distribution expense
381,001

 
43.8
 %
 
363,386

 
47.9
 %
Processing and services
209,952

 
24.1
 %
 
150,816

 
19.9
 %
Sales and marketing
140,507

 
16.1
 %
 
113,849

 
15.0
 %
Costs of products sold
80,734

 
9.3
 %
 
74,041

 
9.8
 %
General and administrative
54,588

 
6.3
 %
 
46,054

 
6.1
 %
Transition and acquisition
1,356

 
0.1
 %
 
1,586

 
0.2
 %
Amortization of acquisition intangibles
26,673

 
3.1
 %
 
25,157

 
3.3
 %
Change in fair value of contingent consideration
(2,997
)
 
(0.3
)%
 
800

 
0.1
 %
Total operating expenses
891,814

 
102.5
 %
 
775,689

 
102.3
 %
OPERATING INCOME (LOSS)
(21,432
)
 
(2.5
)%
 
(18,021
)
 
(2.4
)%
OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
Interest income and other income (expense), net
1,503

 
0.2
 %
 
898

 
0.1
 %
Interest expense
(13,994
)
 
(1.6
)%
 
(8,184
)
 
(1.1
)%
INCOME (LOSS) BEFORE INCOME TAX EXPENSE
(33,923
)
 
(3.9
)%
 
(25,307
)
 
(3.3
)%
INCOME TAX EXPENSE (BENEFIT)
(14,366
)
 
(1.7
)%
 
(10,527
)
 
(1.4
)%
NET INCOME (LOSS) BEFORE ALLOCATION TO NON-CONTROLLING INTERESTS
(19,557
)
 
(2.2
)%
 
(14,780
)
 
(2.0
)%
Loss (income) attributable to non-controlling interests, net of tax
(280
)
 
(0.1
)%
 
(110
)
 
 %
NET INCOME (LOSS) ATTRIBUTABLE TO BLACKHAWK NETWORK HOLDINGS, INC.
$
(19,837
)
 
(2.3
)%
 
$
(14,890
)
 
(2.0
)%
We identify our reportable segments based on how we manage our operations and how our Chief Operating Decision Maker (“CODM”) reviews financial information. Our reportable segments are described below:
U.S. Retail - sale of prepaid cards to consumers in the U.S. through our physical retail distribution partners as well as through our various online distribution channels.
Incentives & Rewards - our incentives businesses in the U.S., which provide software, services and prepaid products to business clients for their loyalty, incentive and reward programs, our e-commerce incentives business, as well as our Achievers business in Canada.
International - our retail and incentives businesses outside of the United States, except for our Achievers business in Canada, which is reported in the Incentives & Rewards segment.
Further information regarding our reportable segments can be found in Note 10Segment Reporting.

22


Operating Revenues, Partner Distribution Expense and Operating Revenues, net of Partner Distribution Expense
The following tables set forth our consolidated Total operating revenues, Partner distribution expense and Operating revenues, net of Partner distribution expense for the 12-week and 24-week periods ended June 17, 2017 and June 18, 2016.
 
12 weeks ended
 
 
 
 
 
June 17, 2017
 
June 18, 2016
 
Change
 
(in thousands, except percentages)
OPERATING REVENUES:
 
 
 
 
 
 
 
Commissions and fees
$
282,633

 
$
262,931

 
$
19,702

 
7.5
%
Program and other fees
107,914

 
67,419

 
40,495

 
60.1
%
Marketing
24,825

 
20,696

 
4,129

 
20.0
%
Product sales
47,774

 
40,160

 
7,614

 
19.0
%
Total operating revenues
$
463,146

 
$
391,206

 
$
71,940

 
18.4
%
Partner distribution expense
201,525

 
191,231

 
10,294

 
5.4
%
Operating revenues, net of Partner distribution expense
$
261,621

 
$
199,975

 
$
61,646

 
30.8
%
 
24 weeks ended
 
 
 
 
 
June 17, 2017
 
June 18, 2016
 
Change
 
(in thousands, except percentages)
OPERATING REVENUES:
 
 
 
 
 
 
 
Commissions and fees
$
537,839

 
$
502,555

 
$
35,284

 
7.0
%
Program and other fees
208,824

 
142,861

 
65,963

 
46.2
%
Marketing
39,106

 
34,155

 
4,951

 
14.5
%
Product sales
84,613

 
78,097

 
6,516

 
8.3
%
Total operating revenues
$
870,382

 
$
757,668

 
$
112,714

 
14.9
%
Partner distribution expense
381,001

 
363,386

 
17,615

 
4.8
%
Operating revenues, net of Partner distribution expense
$
489,381

 
$
394,282

 
$
95,099

 
24.1
%
U.S. Retail
The following tables set forth our Total operating revenues, Partner distribution expense and Operating revenues, net of Partner distribution expense and related key operating statistics for our U.S. Retail segment for the 12-week and 24-week periods ended June 17, 2017 and June 18, 2016.
 
12 weeks ended
 
 
 
 
 
June 17, 2017
 
June 18, 2016
 
Change
 
(in thousands, except percentages)
Total operating revenues
$
237,705

 
$
237,608

 
$
97

 
 %
Partner distribution expense
124,763

 
120,795

 
3,968

 
3.3
 %
Operating revenues, net of Partner distribution expense
$
112,942

 
$
116,813

 
$
(3,871
)
 
(3.3
)%
Transaction dollar volume (1)
$
2,263,834

 
$
2,088,959

 
$
174,875

 
8.4
 %
Prepaid and processing revenues
$
205,032

 
$
194,140

 
$
10,892

 
5.6
 %
Prepaid and processing revenues as a percentage of transaction dollar volume (2)
9.1
%
 
9.3
%
 
(0.2
)%
 
(2.2
)%
Partner distribution expense as a percentage of prepaid and processing revenues
60.9
%
 
62.2
%
 
(1.3
)%
 
(2.1
)%

23


 
24 weeks ended
 
 
 
 
 
June 17, 2017
 
June 18, 2016
 
Change
 
(in thousands, except percentages)
Total operating revenues
$
445,343

 
$
453,104

 
$
(7,761
)
 
(1.7
)%
Partner distribution expense
226,476

 
226,354

 
122

 
0.1
 %
Operating revenues, net of Partner distribution expense
$
218,867

 
$
226,750

 
$
(7,883
)
 
(3.5
)%
Transaction dollar volume (1)
$
4,061,555

 
$
4,005,505

 
$
56,050

 
1.4
 %
Prepaid and processing revenues
$
383,402

 
$
375,194

 
$
8,208

 
2.2
 %
Prepaid and processing revenues as a percentage of transaction dollar volume (2)
9.4
%
 
9.4
%
 
 %
 
 %
Partner distribution expense as a percentage of prepaid and processing revenues
59.1
%
 
60.3
%
 
(1.2
)%
 
(2.0
)%
(1)
Transaction dollar volume represents the total dollar amount of value loaded onto any of our prepaid products. The dollar amount and volume of card sales and rebates processed directly affect the amount of our revenues and direct costs. We measure and monitor Transaction dollar volume by retail distribution partner channel and content provider program.
(2)
Prepaid and processing revenues as a percentage of transaction dollar volumeRepresents the total amount of Commissions and fees and Program and other fees recognized during the period as a percentage of Transaction dollar volume for the same period. Our prepaid product revenues vary among our various product offerings: closed loop gift and prepaid telecom cards generate the highest rates due to the content provider commissions; open loop gift cards also generate high rates due to program management fees, interchange and other fees included in Program and other fees in addition to the consumer purchase fees included in Commissions and fees; financial services products generate the lowest rates due to higher average transaction values. This metric helps us understand and manage overall margins from our product offerings.
Transaction dollar volumeOn October 1, 2015, the payment card industry shifted liability for certain debit and credit card transactions to retailers who do not accept EMV chip technology transactions. During 2016, our non-EMV compliant distribution partners placed restrictions on the sale of open loop gift cards and some closed loop gift cards until they completed their EMV implementation. By the end of 2016, most of our distribution partner store locations were EMV compliant and had lifted those restrictions. In 2017, the negative impact of restricted sales has gradually decreased, and by the second quarter of 2017, sales volumes at our distribution partner store locations have recovered to expected levels, which are reflected in higher transaction dollar volume in the second quarter and first 24 weeks of 2017. In addition, sales from our online distribution channels have increased in the second quarter and first 24 weeks of 2017. These increases were partially offset by the discontinuation of certain low-margin financial services programs, including certain co-branded GPR products, which decreased transaction dollar volume.
Prepaid and processing revenues as a percentage of transaction dollar volume—Decreased for the second quarter of 2017 due to a lower prepaid and processing revenue rate for open loop gift cards, which resulted from a shift in mix from lower denomination cards to higher denomination cards due to the reduction of the impact from EMV restrictions. Prepaid and processing revenues as a percentage of transaction dollar volume was also impacted by lower program management fees due to lower contractual rates with our primary issuing bank. Prepaid and processing revenues as a percentage of transaction dollar volume for the first 24 weeks of 2017 did not change compared to the same period in 2016 primarily due to the increased sales of higher-margin products, offset by a lower prepaid and processing revenue rate for open loop gift cards and increased sales of lower-margin closed gift products.
Partner distribution expense as a percentage of prepaid and processing revenues—Decreased due to increased sales of products for which we incur lower partner distribution expense, as well as an increase in sales through our online distribution channels where we do not incur such expense for sales through our proprietary websites.
Our Operating revenues, net of Partner distribution expense were also impacted by a decrease of $11.4 million and $16.3 million for the second quarter and first 24 weeks of 2017, respectively, in sales from Cardpool. In our Annual Report for the year ended December 31, 2016, we reported that the Cardpool reporting unit had an elevated risk of goodwill impairment due to its exposure to lowered expectations of sales volume related to the card exchange business and lower operating margins. As of December 31, 2016, the fair value of the Cardpool reporting unit exceeded its carrying value by $3.4 million, or 6.9%. During the second quarter of 2017, Cardpool’s operating results were lower than expected due to certain technology

24


implementation issues which we believe have since been resolved. We re-evaluated our forecast for Cardpool and lowered its forecasted revenue growth for the remainder of 2017 and 2018 as a result of changes in expectations regarding our sales pipeline. We reviewed our goodwill impairment assessment for Cardpool as of June 17, 2017 and determined that, while the excess has decreased by approximately $2.0 million, fair value still exceeded its carrying value. We continue to monitor the operating results and cash flows of our reporting units on a quarterly basis for indicators of goodwill impairment.
Incentives & Rewards
The following tables set forth our Total operating revenues, Partner distribution expense and Operating revenues, net of Partner distribution expense and related key operating statistics for our Incentives & Rewards segment for the 12-week and 24-week periods ended June 17, 2017 and June 18, 2016.
 
12 weeks ended
 
 
 
 
 
June 17, 2017
 
June 18, 2016
 
Change
 
(in thousands, except percentages)
Total operating revenues
$
80,702

 
$
61,119

 
$
19,583

 
32.0
%
Partner distribution expense
6,650

 
5,218

 
1,432

 
27.4
%
Operating revenues, net of Partner distribution expense
$
74,052

 
$
55,901

 
$
18,151

 
32.5
%
Prepaid and processing revenues
$
54,979

 
$
51,388

 
$
3,591

 
7.0
%
Partner distribution expense as a percentage of prepaid and processing revenues
12.1
%
 
10.2
%
 
1.9
%
 
18.6
%
 
24 weeks ended
 
 
 
 
 
June 17, 2017
 
June 18, 2016
 
Change
 
(in thousands, except percentages)
Total operating revenues
$
143,927

 
$
120,773

 
$
23,154

 
19.2
%
Partner distribution expense
10,736

 
8,049

 
2,687

 
33.4
%
Operating revenues, net of Partner distribution expense
$
133,191

 
$
112,724

 
$
20,467

 
18.2
%
Prepaid and processing revenues
$
104,235

 
$
101,857

 
$
2,378

 
2.3
%
Partner distribution expense as a percentage of prepaid and processing revenues
10.3
%
 
7.9
%
 
2.4
%
 
30.4
%

Prepaid and processing revenues—In the second quarter of 2017, we entered into a contractual amendment with one of our issuing banks to standardize fees across different products. The amendment resulted in a one-time benefit of $0.9 million in the second quarter of 2017. Excluding this benefit, prepaid and processing revenues increased by $2.7 million for the second quarter of 2017 primarily driven by the growth in our employee engagement business. Prepaid and processing revenues grew $2.4 million for the first 24 weeks of 2017, primarily due to $4.9 million increase in the employee engagement business, $1.1 million increase due to growth in our rebate and incentive processing business, $0.9 million increase related to the contractual amendment entered into during the second quarter of 2017, offset by a one-time benefit of $4.3 million in the first 24 weeks of 2016 as a result of a contractual amendment with one of our issuing banks.
Partner distribution expense as a percentage of prepaid and processing revenue—Increased due to higher proportion of sales through business clients for which we recognize net pricing discounts as an expense.
Our Operating revenues and Operating revenues net of Partner distribution expense also increased for the second quarter and first 24 weeks of 2017 due to an increase in product sales of $16.0 million and $20.8 million for the second quarter and first 24 weeks of 2017, respectively, due to the growth in our incentives loyalty programs.

25


International
The following tables set forth our Total operating revenues, Partner distribution expense and Operating revenues, net of Partner distribution expense and related key operating statistics for our International segment for the 12-week and 24-week periods ended June 17, 2017 and June 18, 2016.
 
12 weeks ended
 
 
 
 
 
June 17, 2017
 
June 18, 2016
 
Change
 
(in thousands, except percentages)
Total operating revenues
$
144,739

 
$
92,479

 
$
52,260

 
56.5
 %
Partner distribution expense
70,112

 
65,218

 
4,894

 
7.5
 %
Operating revenues, net of Partner distribution expense
$
74,627

 
$
27,261

 
$
47,366

 
173.8
 %
Prepaid and processing revenues
$
130,536

 
$
84,822

 
$
45,714

 
53.9
 %
Partner distribution expense as a percentage of prepaid and processing revenues
53.7
%
 
76.9
%
 
(23.2
)%
 
(30.2
)%
 
24 weeks ended
 
 
 
 
 
June 17, 2017
 
June 18, 2016
 
Change
 
(in thousands, except percentages)
Total operating revenues
$
281,112

 
$
183,791

 
$
97,321

 
53.0
 %
Partner distribution expense
143,789

 
128,983

 
14,806

 
11.5
 %
Operating revenues, net of Partner distribution expense
$
137,323

 
$
54,808

 
$
82,515

 
150.6
 %
Prepaid and processing revenues
$
259,027

 
$
168,365

 
$
90,662

 
53.8
 %
Partner distribution expense as a percentage of prepaid and processing revenues
55.5
%
 
76.6
%
 
(21.1
)%
 
(27.5
)%

Prepaid and processing revenues—Our acquisition of The Grass Roots Group Holdings Limited and its subsidiaries (collectively, “Grass Roots”) in the fourth quarter of 2016 accounted for a $37.4 million and $67.6 million increase to our prepaid and processing revenues for the second quarter and the first 24 weeks of 2017, respectively, of which $20.3 million for the second quarter and $35.4 million for the first 24 weeks of 2017 related to the Meetings & Events business (see Note 5Consolidated Financial Statement Details—Assets held for sale). Prepaid and processing revenues also increased $8.3 million and $23.1 million for the second quarter and first 24 weeks of 2017, respectively, due to increased sales volume in all regions, primarily Germany, Mexico and from our sub-distributor relationships, primarily in Japan.
Partner distribution expense as a percentage of prepaid and processing revenues—Decreased mainly due to our acquisition of Grass Roots, which did not incur any partner distribution expense. Excluding Grass Roots, our partner distribution expense as a percentage of prepaid and processing revenue decreased from 76.9% to 75.1% for the second quarter and from 76.6% to 75.0% for the first 24 weeks of 2017. The decrease for both the second quarter and first 24 weeks of 2017 is due to higher sales of products which have minimal partner distribution expense along with a decrease in proportion of sales through our sub-distributor relationships, primarily in Japan (which have higher commission share arrangements but for which we incur minimal other operating expenses).
Operating revenues and Operating revenues, net of Partner distribution expense were also impacted by an increase in marketing revenue of $4.9 million and $6.5 million, for the second quarter and first 24 weeks of 2017, respectively, mainly due to activity in Japan.

26


Operating Expenses
The following tables set forth our consolidated operating expenses for the 12-week and 24-week periods ended June 17, 2017 and June 18, 2016.
 
12 weeks ended
 
 
 
 
 
June 17, 2017
 
June 18, 2016
 
Change
 
(in thousands, except percentages)
OPERATING EXPENSES:
 
 
 
 
 
 
 
Partner distribution expense
$
201,525

 
$
191,231

 
$
10,294

 
5.4
 %
Processing and services
107,680

 
76,875

 
30,805

 
40.1
 %
Sales and marketing
77,722

 
60,511

 
17,211

 
28.4
 %
Costs of products sold
44,541

 
38,309

 
6,232

 
16.3
 %
General and administrative
25,563

 
22,557

 
3,006

 
13.3
 %
Transition and acquisition
905

 
641

 
264

 
41.2
 %
Amortization of acquisition intangibles
13,648

 
15,259

 
(1,611
)
 
(10.6
)%
Change in fair value of contingent consideration
(4,037
)
 
800

 
(4,837
)
 
N/M
Total operating expenses
$
467,547

 
$
406,183

 
$
61,364

 
15.1
 %
 
24 weeks ended
 
 
 
 
 
June 17, 2017
 
June 18, 2016
 
Change
 
(in thousands, except percentages)
OPERATING EXPENSES:
 
 
 
 
 
 
 
Partner distribution expense
$
381,001

 
$
363,386

 
$
17,615

 
4.8
 %
Processing and services
209,952

 
150,816

 
59,136

 
39.2
 %
Sales and marketing
140,507

 
113,849

 
26,658

 
23.4
 %
Costs of products sold
80,734

 
74,041

 
6,693

 
9.0
 %
General and administrative
54,588

 
46,054

 
8,534

 
18.5
 %
Transition and acquisition
1,356

 
1,586

 
(230
)
 
(14.5
)%
Amortization of acquisition intangibles
26,673

 
25,157

 
1,516

 
6.0
 %
Change in fair value of contingent consideration
(2,997
)
 
800

 
(3,797
)
 
N/M
Total operating expenses
$
891,814

 
$
775,689

 
$
116,125

 
15.0
 %


27


Partner distribution expense—Please see our discussion of Operating revenues, net of Partner distribution expense and Partner distribution expense as a percentage of prepaid and processing revenues for our reportable segments above.
Processing and Services
Processing and services expenses as a percentage of Prepaid and processing revenues increased from 23.3% to 27.6% for the second quarter and from 23.4% to 28.1% for the first 24 weeks of 2017 primarily due to our acquisition of Grass Roots in the fourth quarter of 2016. Processing and services expenses increased by $30.8 million for the second quarter ($59.1 million for the first 24 weeks) of 2017 primarily due to costs related to Grass Roots in the amount of $23.7 million for the second quarter ($43.4 million for the first 24 weeks) of 2017, of which $16.7 million for the second quarter ($29.3 million for the first 24 weeks) of 2017 was related to the Meetings & Events business (see Note 5Consolidated Financial Statement Details—Assets held for sale). Excluding Grass Roots, Processing and services expenses were impacted by $2.3 million increase for the second quarter ($5.7 million for the first 24 weeks) of 2017 for technology and infrastructure, including depreciation of capitalized software, activation transaction processing and other equipment; $2.3 million increase for the second quarter ($2.7 million for the first 24 weeks) of 2017 for technology and operations personnel including employee and contractor compensation, benefits and travel related costs; $1.3 million increase for the second quarter ($3.1 million for the first 24 weeks) of 2017 for program management and maintaining our distribution network including launch costs for Target Corporation as a new distribution partner; and $1.2 million increase for the second quarter ($4.3 million for the first 24 weeks) of 2017 for merchant services and other costs.
Sales and Marketing
Sales and marketing expenses increased by $17.2 million and $26.7 million for the second quarter and first 24 weeks of 2017, respectively. Grass Roots contributed $7.9 million and $13.6 million of the increase in those respective periods. Excluding Grass Roots, the increase in Sales and marketing expenses is primarily due to $8.3 million and $13.8 million in higher program marketing expenses, including costs related to our Visa 5% cash back program.
Costs of Products Sold
Costs of products sold increased by $17.4 million and $19.8 million in product costs related to our incentives business and card services for the second quarter and first 24 weeks of 2017, respectively, reflecting the increase in product sales in our incentives business. The increase is partially offset by decreases in Cardpool costs of $9.0 million and $12.9 million for the second quarter and first 24 weeks of 2017, respectively, reflecting lower sales from Cardpool. Gross margin increased for the second quarter of 2017 primarily due to increases in the gross margin for both our card services and incentives and loyalty programs, but gross margin decreased for the first 24 weeks of 2017 due to the negative impact from Cardpool.
General and Administrative
General and administrative expenses increased primarily due to increases of $1.1 million for the second quarter and $6.1 million the first 24 weeks of 2017 related to higher personnel costs, including employee compensation, benefits and travel related costs, as a result of increased headcount from acquisitions. General and administrative expenses also increased $1.0 million for the second quarter and $1.6 million for the first 24 weeks of 2017 due to higher rent expense, professional services and other costs. In addition, in the second quarter of 2016, we had a one-time gain of $0.8 million from the sale of our U.S. GPR business under the PayPower brand, net of related write-offs of GPR technology assets.
Transition and Acquisition
Transition and acquisition expenses include legal, tax, audit and valuation professional services related to acquisitions, severance resulting from integration of acquisitions and certain employment compensation payments that we recognize in our post combination financial statements. In the second quarter and first 24 weeks of 2017, we incurred such expenses related to our acquisition made in the first quarter of 2017 as well as on-going acquisition activity.
Amortization of Acquisition Intangibles
Amortization expense increased in the second quarter and the first 24 weeks of 2017 due to the addition of intangibles from our various acquisitions in 2016.
Change in Fair Value of Contingent Consideration
The change in the fair value of contingent consideration relates to our Extrameasures acquisition in 2016. Changes in contingent liabilities result from changes in time value of money and changes in expectations related to the meeting of financial targets.

28


Other Income (Expense) and Income Tax Expense (Benefit)
The following tables set forth our consolidated other income (expense), and income tax expense (benefit) and effective tax rates for 12-week and 24-week periods ended June 17, 2017 and June 18, 2016:
 
12 weeks ended
 
 
 
 
 
June 17, 2017
 
June 18, 2016
 
Change
 
(in thousands, except percentages)
OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
Interest income and other income (expense), net
$
667

 
$
486

 
$
181

 
37.2
 %
Interest expense
(7,051
)
 
(4,118
)
 
(2,933
)
 
71.2
 %
Total other income (expense)
$
(6,384
)
 
$
(3,632
)
 
$
(2,752
)
 
75.8
 %
INCOME TAX EXPENSE (BENEFIT)
$
(4,591
)
 
$
(7,290
)
 
$
2,699

 
(37.0
)%
EFFECTIVE TAX RATE
42.6
%
 
39.2
%
 
3.4
%
 
 
 
24 weeks ended
 
 
 
 
 
June 17, 2017
 
June 18, 2016
 
Change
 
(in thousands, except percentages)
OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
Interest income and other income (expense), net
$
1,503

 
$
898

 
$
605

 
67.4
%
Interest expense
(13,994
)
 
(8,184
)
 
(5,810
)
 
71.0
%
Total other income (expense)
$
(12,491
)
 
$
(7,286
)
 
$
(5,205
)
 
71.4
%
INCOME TAX EXPENSE (BENEFIT)
$
(14,366
)
 
$
(10,527
)
 
$
(3,839
)
 
36.5
%
EFFECTIVE TAX RATE
42.3
%
 
41.6
%
 
0.7
%
 
 
Other Income (Expense)
Interest income and other income (expense), net increased for the second quarter and the first 24 weeks of 2017 primarily due to higher interest received for investments as well as lower foreign exchange losses compared to the second quarter and the first 24 weeks of 2016.
Interest expense includes interest charged under our Restated Credit Agreement and convertible notes (see Note 3—Financing in the notes to our condensed financial statements), the amortization of deferred financing costs and the discount on our term loan and convertible notes. In the second quarter of 2017, interest expense for our credit facility and convertible notes increased by $0.2 million and amortization expense increased by $2.7 million. For the first 24 weeks of 2017, interest expense for our credit facility and convertible notes increased by $0.4 million and amortization expense increased by $5.5 million. The increase in interest expense for our credit facility was primarily due to overall higher level of borrowings, as driven by our acquisition activity; the increase in amortization expense was driven by the increase in deferred financing costs and debt discounts when we issued the convertible notes during the third quarter of 2016.
Income Tax Expense (Benefit)
Our effective tax rates were 42.6% and 39.2% for the 12 weeks ended June 17, 2017 and June 18, 2016, respectively, and 42.3% and 41.6% for the 24 weeks ended June 17, 2017 and June 18, 2016, respectively. The effective rate for the 12 weeks and 24 weeks ended June 17, 2017 was higher primarily due to excess tax benefits of employee stock-based compensation.


29


Liquidity and Capital Resources
The following table sets forth the major sources and uses of cash for the 24 weeks ended June 17, 2017 and June 18, 2016.
 
24 weeks ended
 
June 17, 2017
 
June 18, 2016
 
(in thousands)
Net cash (used in) provided by operating activities
$
(694,289
)
 
$
(643,277
)
Net cash (used in) provided by investing activities
(61,106
)
 
(166,569
)
Net cash (used in) provided by financing activities
33,990

 
154,610

Effect of exchange rate changes on cash and cash equivalents
8,351

 
4,648

Decrease in cash and cash equivalents
$
(713,054
)
 
$
(650,588
)
Cash Flows from Operating Activities
Our use of cash during both 24 weeks ended June 17, 2017 and June 18, 2016 primarily reflects the timing of cash settlement of Settlement receivables, Settlement payables and Consumer and customer deposits which are significantly impacted by the portion of gift card sales that occur in late December. Excluding the impact of these settlement related items, net cash provided by operating activities during the 24 weeks ended June 17, 2017 increased by $26.2 million compared to the 24 weeks ended June 18, 2016. This increase in cash primarily reflects:
an increase of $32.2 million cash provided by non-settlement related operating assets and liabilities for the 24 weeks ended June 17, 2017 compared to the 24 weeks ended June 18, 2016, due to an increase in our operating liabilities; partially offset by
a decrease of $6.7 million cash provided by income tax related receivables and payables for the 24 weeks ended June 17, 2017 compared to the 24 weeks ended June 18, 2016, due to a non-recurring income tax refund of $7.5 million received in the 24 weeks ended June 18, 2016.
Cash Flows from Investing Activities
The net cash used in investing activities for the 24 weeks ended June 17, 2017 totaled $61.1 million, which primarily included $30.2 million for expenditures for property, equipment and technology, $10.6 million for a restricted cash deposit, $10.3 million for the acquisition of a company in the rebates and incentives business and $5.6 million investment in equity ventures. The net cash used in investing activities for the 24 weeks ended June 18, 2016 totaled $166.6 million, which primarily included $144.5 million for our acquisitions of GiftCards, NimbleCommerce and Extrameasures and $20.3 million for expenditures for property, equipment and technology.
Cash Flows from Financing Activities
The net cash provided by financing activities for the 24 weeks ended June 17, 2017 totaled $34.0 million, primarily driven by an additional $50.0 million draw down on our term loan under our Restated Credit Agreement, as amended (see Note 3Financing in the notes to our condensed consolidated financial statements), and $10.4 million net proceeds from employee stock-related activities, partially offset by our term loan repayment of $10.0 million, $9.7 million related to the exercise and settlement of employee stock awards and $5.5 million payment of contingent consideration related to the Extrameasures acquisition.
The net cash provided by financing activities for the 24 weeks ended June 18, 2016 totaled $154.6 million, primarily driven by the $100.0 million draw down on our term loan and net increase of $100.0 million in our bank line of credit. These were offset by repayments of $37.5 million for our term loan and $9.0 million for debt assumed in our acquisitions of GiftCards and NimbleCommerce.

Off-Balance Sheet Arrangements
None.

30


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to our market risk position from the information provided under “Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report filed on Form 10-K filed with the Securities and Exchange Commission on February 27, 2017.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 17, 2017. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of June 17, 2017, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the fiscal quarter ended June 17, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more persons or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

31


PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved from time to time in various legal proceedings arising in the ordinary course of business, including the matters described below. Although the outcome of any pending matters, including the matters described below, and the amount, if any, of our ultimate liability and any other forms of remedies with respect to these matters, cannot be determined or predicted with certainty, we currently do not believe that it is probable that the resolution of any of these matters would result in any liability that would have a material adverse effect on our results of operations or financial condition.
On March 30, 2015, Greg Haney in his capacity as Seller Representative for CardLab, Inc. filed a lawsuit against us in the Delaware Chancery Court (CardLab, Inc. v. Blackhawk Network Holdings, Inc., Case No. 10851). The complaint generally alleges that we failed to disclose material information relating to a potential earn-out payment in connection with our acquisition of CardLab, Inc. in 2014. We believe that the suit is without merit, and we are vigorously defending ourselves against these claims. On June 8, 2015, we filed a motion to dismiss the complaint. On June 22, 2015, the plaintiff filed an amended complaint.  On July 7, 2015, we filed a motion to dismiss the case in its entirety. On February 26, 2016, the Court granted the motion to dismiss in part, dismissing two claims of the amended complaint. On March 25, 2016, we filed our answer denying the remaining claims and a counterclaim for attorneys’ fees pursuant to the merger agreement contemplating the acquisition of CardLab, Inc. between the parties. On June 22, 2016, the plaintiff filed a motion to dismiss our counterclaim for indemnification. On July 22, 2016, we filed an amended counterclaim in response. On August 5, 2016, the plaintiff filed a reply. On May 11, 2017, the parties updated the Court regarding the status of the case.
In addition, we transact business in non-U.S. markets and may, from time to time, be subject to disputes and tax audits by foreign tax authorities related to indirect or other value added taxes typically on commissions or fees received from non-residents content providers. 
ITEM 1A. RISK FACTORS

Our business is subject to many risks and uncertainties, which may materially and adversely affect our business, prospects, financial condition and results of operations. These risk factors are disclosed in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended on December 31, 2016. There have been no material changes to our risk factors since our Annual Report on Form 10-K.














32


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table summarizes purchases of our ordinary shares made by or on behalf of us or any of our “affiliated purchasers” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended, during each fiscal period during the 12 weeks ended June 17, 2017:
Period
 
Total Number of Shares Purchased (1)
 
Average Price Paid per Share (2)
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
 
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
March 26, 2017 to April 22, 2017
 
8,916

 
 
$
38.70

 

 
 
$

April 23, 2017 to May 20, 2017
 

 
 
$

 

 
 
$

May 21, 2017 to June 17, 2017
 

 
 
$

 

 
 
$

Total
 
8,916

 
 
$
38.70

 

 
 
$

_________________________
(1)
This table does not include shares of common stock that we withheld in order to satisfy minimum tax withholding requirements in connection with the vesting of restricted stock units or exercise of options or stock appreciation rights. The numbers represent the shares of common stock that we withheld in order to satisfy minimum tax withholding requirements in connection with the vesting of restricted stock awards.
(2)
Average price paid per share of common stock does not include brokerage commissions.

In October 2016, the Company’s Board of Directors approved a stock repurchase program that authorizes the Company to purchase up to $100 million of the Company’s outstanding common stock over a period of up to two (2) years. Under the repurchase program, purchases of shares of common stock may be made from time to time in the open market, or in privately negotiated transactions, or as otherwise may be determined by the authorized officers of the Company, in compliance with applicable state and federal securities laws. The timing and amounts of any purchases are based on market conditions and other factors including price, regulatory requirements, and capital availability. The stock repurchase program does not obligate the company to acquire any specific number of shares in any period. As of June 17, 2017, the Company had not made any purchases under the program.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS
A list of exhibits filed with this report or incorporated herein by reference is found in the Index to Exhibits immediately following the signature page of this report and is incorporated into this Item 6 by reference.

33


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Blackhawk Network Holdings, Inc.
 
/s/ Jerry Ulrich
Jerry Ulrich
Chief Financial Officer and Chief Administrative Officer
(Principal Financial Officer and Duly Authorized Signatory)
Date: July 26, 2017


34


INDEX TO EXHIBITS
 
 
 
 
Incorporated by Reference
 
Filed
Herewith
Exhibit No
 
Description of Exhibit
 
Form
 
File No.
 
Exhibit(s)
 
Filing Date
 

3.1
 
 
8-K
 
001-35882
 
3.1
 
June 9, 2017
 
 

3.2
 
 
8-K
 
001-35882
 
3.2
 
June 9, 2017
 
 

10.1
 

 
8-K
 
001-35882
 
10.1
 
April 27, 2017
 
 

10.2+
 
 
8-K
 
001-35882
 
10.1
 
May 22, 2017
 
 

10.3+
 
 
DEF 14A
 
001-35882
 
Annex A
 
April 20, 2017
 
 

10.4
 

 
 
 
 
 
 
 
 
 
X
31.1
 

 
 
 
 
 
 
 
 
 
X
31.2
 

 
 
 
 
 
 
 
 
 
X

32.1*
 

 
 
 
 
 
 
 
 
 
X

101.INS
 
XBRL Instance Document
 
 
 
 
 
 
 
 
 
X

101.SCH
 
XBRL Taxonomy Extension Schema
 
 
 
 
 
 
 
 
 
X

101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
 
 
 
 
 
 
X

101.DEF
 
XBRL Taxonomy Extension Definition Linkbase
 
 
 
 
 
 
 
 
 
X

101.LAB
 
XBRL Taxonomy Extension Label Linkbase
 
 
 
 
 
 
 
 
 
X

101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase
 
 
 
 
 
 
 
 
 
X

______________________

35


+

Indicates a management contract or compensatory plan.
*
The certification attached as Exhibit 32.1 to this Quarterly Report is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of this Quarterly Report), irrespective of any general incorporation language contained in such filing.



36