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.
Merger Agreement
On January 15, 2018, we entered into an agreement and plan of merger (the “Merger Agreement”) with BHN Holdings, Inc., a Delaware corporation (“Parent”), and BHN Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”). The Merger Agreement provides, among other things and subject to the terms and conditions set forth therein, that Merger Sub will be merged with and into the Company (the “Merger”), with the Company continuing as the surviving corporation and as a wholly owned subsidiary of Parent. Parent has agreed to acquire the Company in an all-cash transaction for a total consideration of approximately $3.5 billion, which includes assumption of our debt. Pursuant to the terms of the Merger Agreement, the completion of the Merger is subject to the satisfaction or waiver of certain customary closing conditions, including the stockholder approval which was obtained at the Special Meeting of Stockholders held on March 30, 2018. The completion of the Merger remains subject to certain other customary closing conditions, including, among others, (i) the absence of any law, order or injunction of a court or governmental entity of competent jurisdiction prohibiting the consummation of the Merger or the other transactions contemplated by the Merger Agreement; (ii) receipt of certain consents and approvals (or confirmation that no consent is required) from the applicable regulatory authority in a number of jurisdictions, including various U.S. states; and (iii) the absence of a “material adverse effect” on the Company after the date of the Merger Agreement. As of the date of this report, the Company continues to expect to complete the Merger in mid-2018. See Part I, Item 1A, “Risk Factors” and
Note 16- Subsequent Event
of the Notes to Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the fiscal year ended on December 30, 2017, filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2018 (the “Annual Report”).
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 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 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 29, 2018
or for any other interim period or other future year. Our condensed consolidated balance sheet as of
December 30, 2017
, 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. 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.
Significant Accounting Policies
The Company's significant accounting policies are detailed in "Note 1: Summary of Significant Accounting Policies" within Item 8 of the Company's Annual Report on Form 10-K for the year ended December 30, 2017.
Recently 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)(“ASC 606”), which, along with amendments issued in 2015, 2016 and 2017, replaces nearly all current U.S. GAAP guidance on this topic with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. This new guidance provides a five-step analysis in determining when and how revenue is recognized. Under the new guidance, 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 new guidance requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
As part of our assessment and implementation plan, we evaluated and made changes to our policies and procedures. Additionally, we evaluated the impact of this new guidance on the purchase accounting or intangibles assets from our recent acquisitions; this resulted in a reclassification of certain backlog assets to contract asset, with no impact to our consolidated net income. The Company adopted this new guidance using the full retrospective method in the first quarter of fiscal 2018, which impacted each prior reporting period presented.
Revenue Recognition under ASC 606
Performance obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Certain of the Company’s contracts have multiple performance obligations, as the promise to transfer individual goods or services is separately identifiable from other promises in the contracts and, therefore, is distinct. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation based on its relative standalone selling price. Our performance obligations are satisfied at a point in time or over time as work progresses.
Revenue from goods and services transferred to customers at a point in time accounted for
5%
and
6%
of total operating revenues for the 12 weeks ended March 24, 2018 and March 25, 2017, respectively. Revenue recognized at a point in time relates to our card production services, handset sales and our Cardpool business. Revenue on these contracts is recognized when the goods are delivered or when the service is provided.
Revenue from products and services transferred to customers over time accounted for
95%
and
94%
of total operating revenues for the 12 weeks ended March 24, 2018 and March 25, 2017, respectively. This primarily includes revenue related to our employee engagement business, our rebate processing and reward fulfillment businesses as well as the sale of closed loop and open loop gift cards under long-term contracts for which we have a stand-ready obligation to provide services over the term of the contract. Revenue is typically recognized over time using an input measure (e.g., number of days passed or units sold) to measure progress.
Revenue allocated to the remaining performance obligations represent contracted revenue that has not yet been recognized (“contracted not recognized”), which includes deferred revenue and amounts that will be invoiced and
recognized as revenue in future periods, including noncancelable contractual commitments related to our employee engagement business. Based on average historical commission rates earned on redeemed points, total contracted not recognized revenue was
$107.7 million
as of March 24, 2018. Based on historical trends, points related to our employee engagement business are estimated to be redeemed and recognized as revenue within a year following the issuance of such points. The Company expects to recognize approximately
61%
of its remaining performance obligations as revenue in fiscal 2018, an additional
20%
by fiscal 2019 and
19%
of the amount thereafter.
Significant Estimates
Transaction price—
The transaction price is determined based on the consideration to which we expect to be entitled in exchange for transferring services to the customer. The nature of our contracts gives rise to several types of variable consideration. The amount of program management fees or merchant commissions that we will receive from the card partner or issuing bank varies according to the redemption rates on those cards. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. We estimate the amount we ultimately expect to collect from our customers and record a receivable or contract asset depending on the contractual billing schedule. Estimating the transaction price requires significant management judgment about future events and is based on historical card redemption patterns as well as other relevant information for the respective card programs. The estimated transaction price is determined at the inception of the contract; we recognize the related revenue as the performance obligation is fulfilled.
Standalone selling price—
For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation based on its relative standalone selling price. The standalone selling prices are determined based on the prices at which the Company separately sells these services. For services that are not sold separately, the Company estimates the standalone selling prices using the expected cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service. Forecasting the expected costs and estimating the appropriate margin require significant management judgement and affects the timing of revenue recognition.
Material right—
We also consider whether renewal options for certain customer contracts represents a material right and should be accounted for as a separate performance obligation. This requires us to evaluate whether the renewal option to acquire additional goods and services provides the customer with a discount that is incremental to a discount typically given to that class of customer. We concluded that one of our key customer contracts includes a material right and we have accounted for this material right as a separate performance obligation.
These significant estimates are re-assessed each reporting period as required.
Contract Balances
We receive payments from customers based upon contractual billing schedules. The timing of revenue recognition, billings and cash collections results in contract assets (billed accounts receivable and unbilled receivables), and contract liabilities. We record a receivable when we have an unconditional right to invoice and receive payment in the future. Amounts recognized as revenue in excess of amounts billed are recorded as unbilled receivables. Unbilled receivables which are anticipated to be invoiced in the next twelve months are included in
Accounts receivable, net
on the condensed consolidated balance sheet. Long-term unbilled receivables are included in
Other assets
. Amounts collected in advance of services being provided are included in
Contract Liability
if we expect to recognize the revenue within the next twelve months. Long-term contract liabilities are included in
Other Liabilities
.
The following table provides information about receivables and contract liabilities from contracts with customers (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 24, 2018
|
|
December 30, 2017
|
|
March 25, 2017
|
|
Accounts receivables, net
|
$
|
152,262
|
|
|
$
|
185,741
|
|
|
$
|
259,138
|
|
|
|
|
|
|
|
|
|
Unbilled receivables, current
|
$
|
143,824
|
|
|
$
|
193,734
|
|
|
$
|
167,392
|
|
|
Unbilled receivables, long-term
|
11,265
|
|
|
9,235
|
|
|
1,475
|
|
|
Total unbilled receivables
|
$
|
155,089
|
|
|
$
|
202,969
|
|
|
$
|
168,867
|
|
|
|
|
|
|
|
|
|
Contract liabilities, current
|
$
|
54,088
|
|
|
$
|
60,607
|
|
|
$
|
46,867
|
|
|
Contract liabilities, long-term
|
24,463
|
|
|
23,897
|
|
|
16,318
|
|
|
Total contract liabilities
|
$
|
78,551
|
|
|
$
|
84,504
|
|
|
$
|
63,185
|
|
Changes in contract liabilities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
12 weeks ended
|
|
|
March 24, 2018
|
|
March 25, 2017
|
|
Balance, beginning of period
|
$
|
84,504
|
|
|
$
|
63,410
|
|
|
Revenue recognized that was included in the contract liability balance at beginning of period
|
(51,790
|
)
|
|
(39,222
|
)
|
|
Deferrals, excluding amounts recognized as revenue during the period
|
45,625
|
|
|
38,799
|
|
|
Exchange rate effect
|
212
|
|
|
198
|
|
|
Balance, end of period
|
$
|
78,551
|
|
|
$
|
63,185
|
|
Contract Costs
Cost to obtain a contract—
The Company defers all incremental costs of acquiring customer contracts, which consist of sales commissions paid or payable to our direct sales force. The deferred commission amounts are recoverable through future revenue streams under the contracts and are amortized on a straight-line basis over an estimated period of benefit of
six
years. Deferred commissions were
$8.2 million
and
$6.5 million
at March 24, 2018 and March 25, 2017, respectively. Amortization recognized during the 12 weeks ended March 24, 2018 and March 25, 2017, was
$0.3 million
and
$0.3 million
, respectively, included in
Sales and marketing
expense. There was no impairment loss in relation to the deferred commissions.
Cost to fulfill a contract—
The Company sometimes incurs costs to fulfill its contract obligations before transferring goods or services to the customer. In certain card programs (for example, aggregated category gift cards), where redemption service has been identified to be the only performance obligation under ASC 606, we incur partner distribution expense upon the sale of a card prior to performing the redemption service. The costs are recoverable through the future revenue streams associated with the card programs. Under ASC 606, such costs are deferred and recognized in
Partner Distribution Expense
ratably in proportion to the historical redemption patterns of the card portfolio over the estimated life of the card. Deferred partner distribution expenses were
$2.4 million
and
$4.3 million
at March 24, 2018 and March 25, 2017, respectively. Amortization recognized during the three months ended March 24, 2018 and March 25, 2017, was
$2.4 million
and
$2.5 million
, respectively. There was no impairment loss in relation to the deferred partner distribution expenses.
Disaggregation of revenue
The following table provides information about disaggregated revenue by major product line for each of our segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 weeks ended
|
|
|
March 24, 2018
|
|
|
U.S. Retail
|
|
Incentives & Rewards
|
|
International
|
|
Total
|
|
Card services
—
physical retail (1)
|
$
|
185,625
|
|
|
$
|
—
|
|
|
$
|
118,171
|
|
|
$
|
303,796
|
|
|
Card services
—
e-commerce (2)
|
25,787
|
|
|
12,921
|
|
|
—
|
|
|
38,708
|
|
|
Marketing services (3)
|
5,770
|
|
|
—
|
|
|
8,597
|
|
|
14,367
|
|
|
Other services (4)
|
14,753
|
|
|
44,533
|
|
|
13,051
|
|
|
72,337
|
|
|
|
$
|
231,935
|
|
|
$
|
57,454
|
|
|
$
|
139,819
|
|
|
$
|
429,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 weeks ended
|
|
|
March 25, 2017
|
|
|
U.S. Retail
|
|
Incentives & Rewards
|
|
International
|
|
Total
|
|
Card services—physical retail (1)
|
$
|
159,647
|
|
|
$
|
—
|
|
|
$
|
98,097
|
|
|
$
|
257,744
|
|
|
Card services—e-commerce (2)
|
11,459
|
|
|
8,719
|
|
|
—
|
|
|
20,178
|
|
|
Marketing services (3)
|
7,309
|
|
|
—
|
|
|
6,972
|
|
|
14,281
|
|
|
Other services (4)
|
19,558
|
|
|
44,541
|
|
|
30,110
|
|
|
94,209
|
|
|
|
$
|
197,973
|
|
|
$
|
53,260
|
|
|
$
|
135,179
|
|
|
$
|
386,412
|
|
(1)
Card services-physical retail:
This includes all prepaid products sold in our retail distribution stores and card production services.
(2)
Card services-e-commerce:
This includes all prepaid products sold online through either our own websites or third-party online retailers. It also includes our first-party digital business, our loyalty business as well as digital services for online and mobile applications.
(3)
Marketing services:
Funds received from content providers to promote their prepaid cards throughout our distribution partner network.
(4)
Other services:
This includes our rebate processing and reward fulfillment businesses, software and reward redemption revenue from our employee engagement business, telecom handset sales, our Cardpool business and the Meetings and Events business of Grass Roots, which was sold in the fourth quarter of 2017.
In addition, see
Note 10
—
Segment Reporting
for additional information regarding our reportable segments.
Significant changes in accounting policies resulting from the adoption of ASC 606
Revenue
Content Provider Commissions—
Under the new guidance, we will continue to recognize content provider commissions for closed loop cards as revenue at the time of card activation, as that is the time that our performance obligation to the content provider is complete. However, the actual revenue recognition treatment required under the new guidance may be dependent on contract-specific terms and, therefore, may vary in some instances.
Consumer Purchase Fees and Program Management Fees—
Under the new guidance, we consider the transaction price for our open loop gift cards, including our Visa gift card, to include consumer purchase fees and program management fees. Under the new guidance, we have identified three performance obligations
-
distribution-and-activation, redemption service and customer care. Revenue from consumer purchase fees and program management fees, included within
Commissions and fees
and
Program and other fees
, respectively, related to our Visa gift cards will predominantly be recognized as revenue at the time of card activation when our distribution-and-activation obligation is
complete. The remainder will be recognized over the estimated period of card redemption as redemption service and customer care obligations are performed. Under previous GAAP, we defer these revenues and recognize them based on the redemption pattern of the card. Interchange revenue will be recognized over the period of card redemption as we provide information required for card redemption, similar to our current revenue recognition. Additionally, revenue from program management fees related to our proprietary Visa gift cards issued by MetaBank will be based on a blended rate over the appropriate periods as required by the contract-specific terms compared to a contractually stated rate under the current accounting policy. Although we expect the blended rate to be lower than the contract rate initially, the economics of the arrangement will be the same over the term of the contract period. Under previous GAAP, we defer consumer purchase fees and program management fees related to our Visa gift cards in
Deferred revenue
and recognize revenue ratably in proportion to the historical redemption patterns of the card portfolio over the estimated life of the card.
Rebate Processing Fees—
Under the new guidance, we recognize revenue for rebates fulfilled with open loop incentive cards when we fulfill the cards to the end consumer versus ratably in proportion to historical redemption patterns as our performance obligation for rebate processing is complete at time of fulfillment. The recognition of revenue for rebates fulfilled by checks or closed loop cards is recognized at fulfillment and remains unchanged under the new guidance.
Incentive Merchandise Rewards—
Under the new guidance, we classify the costs of certain incentive merchandise rewards issued in connection with our employee engagement solutions as a reduction to revenue versus a cost of products sold. These costs will only be recorded as a cost of product sold if it is determined that we control the goods or services before they are transferred to the customer. In doing so, we will evaluate (i) if we are primarily responsible for fulfilling the promise to provide the good or service; (ii) if we have inventory risk before the good or service has been transferred to customer or after transfer of control to the customer; and (iii) if we have discretion in establishing the price for the good or service.
Operating Expenses
Partner Distribution Expense—
Under the new guidance, partner distribution expense for Visa gift and other open loop incentive cards will be recognized at the time of card activation when our distribution-and-activation obligation is complete. Under previous GAAP, we defer these expenses and amortize them based on the redemption pattern of the card.
Processing and Services—
Under the new guidance, card production and upfront transaction processing fees for the Visa gift card and open loop incentive cards will be recognized at the time of card activation when our distribution-and-activation obligation is complete. Under previous GAAP, these costs are deferred and expensed based on the same redemption pattern as the related revenue.
Sales and Marketing—
The accounting for the recognition of costs related to obtaining customer contracts under the new guidance is different from our current capitalization policy. The adoption of the new guidance results in additional capitalized commissions which will be amortized over a longer term than our previous policy.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires companies to explain the changes in the combined total of restricted and unrestricted cash balances in the statement of cash flows. ASU 2016-18 should be applied using a retrospective transition method, for fiscal years beginning after December 15, 2017, and early adoption is permitted. The Company adopted this new guidance using the full retrospective method in the first quarter of fiscal 2018, which impacted each prior reporting period presented. The new guidance has no impact on the Company’s condensed consolidated balance sheets or income statements; but impacted the presentation of restricted cash and restricted cash equivalents within our condensed consolidated statements of cash flows.
Impacts to Previously Reported Results
Adoption of ASU 2014-09 impacted select lines in our previously reported condensed consolidated balance sheets as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 30, 2017
|
|
|
As Previously Reported
|
|
Impact of Adoption
|
|
As Adjusted
|
|
Assets:
|
|
|
|
|
|
|
Accounts receivable, net
|
$
|
184,994
|
|
|
$
|
747
|
|
|
$
|
185,741
|
|
|
Other current assets
|
$
|
165,374
|
|
|
$
|
(22,637
|
)
|
|
$
|
142,737
|
|
|
Intangible assets, net
|
$
|
431,681
|
|
|
$
|
(703
|
)
|
|
$
|
430,978
|
|
|
Deferred income taxes
|
$
|
236,496
|
|
|
$
|
(699
|
)
|
|
$
|
235,797
|
|
|
Other assets
|
$
|
115,236
|
|
|
$
|
6,431
|
|
|
$
|
121,667
|
|
|
Total assets
|
$
|
4,139,680
|
|
|
$
|
(16,861
|
)
|
|
$
|
4,122,819
|
|
|
Liabilities:
|
|
|
|
|
|
|
Consumer and customer deposits
|
$
|
252,822
|
|
|
$
|
73,863
|
|
|
$
|
326,685
|
|
|
Contract liabilities
(previously reported as Deferred revenue)
|
$
|
179,684
|
|
|
$
|
(119,077
|
)
|
|
$
|
60,607
|
|
|
Deferred income taxes, long term
|
$
|
28,083
|
|
|
$
|
1,002
|
|
|
$
|
29,085
|
|
|
Other liabilities
|
$
|
16,747
|
|
|
$
|
22,130
|
|
|
$
|
38,877
|
|
|
Total liabilities
|
$
|
3,469,713
|
|
|
$
|
(22,082
|
)
|
|
$
|
3,447,631
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
$
|
(16,049
|
)
|
|
$
|
(72
|
)
|
|
$
|
(16,121
|
)
|
|
Retained earnings
|
$
|
72,571
|
|
|
$
|
5,293
|
|
|
$
|
77,864
|
|
|
Total stockholder’s equity
|
$
|
669,967
|
|
|
$
|
5,221
|
|
|
$
|
675,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 25, 2017
|
|
|
As Previously Reported
|
|
Impact of Adoption
|
|
As Adjusted
|
|
Assets:
|
|
|
|
|
|
|
Other current assets
|
$
|
177,463
|
|
|
$
|
(11,565
|
)
|
|
$
|
165,898
|
|
|
Intangible assets, net
|
$
|
340,846
|
|
|
$
|
(2,174
|
)
|
|
$
|
338,672
|
|
|
Deferred income taxes
|
$
|
361,404
|
|
|
$
|
577
|
|
|
$
|
361,981
|
|
|
Other assets
|
$
|
85,647
|
|
|
$
|
5,519
|
|
|
$
|
91,166
|
|
|
Total assets
|
$
|
2,559,139
|
|
|
$
|
(7,643
|
)
|
|
$
|
2,551,496
|
|
|
Liabilities:
|
|
|
|
|
|
|
Consumer and customer deposits
|
$
|
199,822
|
|
|
$
|
69,204
|
|
|
$
|
269,026
|
|
|
Accounts payable
|
$
|
143,858
|
|
|
$
|
(428
|
)
|
|
$
|
143,430
|
|
|
Contract liabilities
(previously reported as Deferred revenue)
|
$
|
140,834
|
|
|
$
|
(93,967
|
)
|
|
$
|
46,867
|
|
|
Deferred income taxes, long term
|
$
|
28,200
|
|
|
$
|
596
|
|
|
$
|
28,796
|
|
|
Other liabilities
|
$
|
37,745
|
|
|
$
|
15,890
|
|
|
$
|
53,635
|
|
|
Total liabilities
|
$
|
1,770,504
|
|
|
$
|
(8,705
|
)
|
|
$
|
1,761,799
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
$
|
(42,861
|
)
|
|
$
|
(106
|
)
|
|
$
|
(42,967
|
)
|
|
Retained earnings
|
$
|
214,833
|
|
|
$
|
1,168
|
|
|
$
|
216,001
|
|
|
Total stockholder’s equity
|
$
|
788,635
|
|
|
$
|
1,062
|
|
|
$
|
789,697
|
|
Adoption of ASU 2014-09 impacted select lines in our previously reported condensed consolidated income statement as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 weeks ended
|
|
|
For the quarter ended March 25, 2017
|
|
|
As Previously Reported
|
|
Impact of Adoption
|
|
As Adjusted
|
|
Operating revenues:
|
|
|
|
|
|
|
Commissions and fees
|
$
|
255,206
|
|
|
$
|
(5,681
|
)
|
|
$
|
249,525
|
|
|
Program and other fees
|
$
|
100,910
|
|
|
$
|
(5,045
|
)
|
|
$
|
95,865
|
|
|
Product sales
|
$
|
36,839
|
|
|
$
|
(10,098
|
)
|
|
$
|
26,741
|
|
|
Total operating revenues
|
$
|
407,236
|
|
|
$
|
(20,824
|
)
|
|
$
|
386,412
|
|
|
Operating expenses:
|
|
|
|
|
|
|
Partner distribution expense
|
$
|
179,476
|
|
|
$
|
(4,353
|
)
|
|
$
|
175,123
|
|
|
Processing and services
|
$
|
102,272
|
|
|
$
|
(1,251
|
)
|
|
$
|
101,021
|
|
|
Sales and marketing
|
$
|
62,785
|
|
|
$
|
(127
|
)
|
|
$
|
62,658
|
|
|
Costs of products sold
|
$
|
36,193
|
|
|
$
|
(8,344
|
)
|
|
$
|
27,849
|
|
|
Amortization of acquisition intangibles
|
$
|
13,025
|
|
|
$
|
(463
|
)
|
|
$
|
12,562
|
|
|
Total operating expenses
|
$
|
424,267
|
|
|
$
|
(14,538
|
)
|
|
$
|
409,729
|
|
|
Income tax expense (benefit)
|
$
|
(9,775
|
)
|
|
$
|
(2,307
|
)
|
|
$
|
(12,082
|
)
|
|
Net income (loss) attributable to Blackhawk Network Holdings, Inc.
|
$
|
(13,486
|
)
|
|
$
|
(3,979
|
)
|
|
$
|
(17,465
|
)
|
|
Diluted earnings (loss) per share
|
$
|
(0.24
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.31
|
)
|
Adoption of ASU 2014-09 and ASU 2016-18 impacted select lines in our previously reported condensed consolidated statement of cash flows as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 weeks ended
|
|
|
March 25, 2017
|
|
|
As Previously Reported
|
|
Impact of Adoption
|
|
As Adjusted
|
|
Net loss
|
$
|
(13,363
|
)
|
|
$
|
(3,979
|
)
|
|
$
|
(17,342
|
)
|
|
Amortization of intangibles
|
$
|
14,218
|
|
|
$
|
(463
|
)
|
|
$
|
13,755
|
|
|
Deferred income taxes
|
$
|
—
|
|
|
$
|
(2,307
|
)
|
|
$
|
(2,307
|
)
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Other current assets
|
$
|
(2,215
|
)
|
|
$
|
(4,931
|
)
|
|
$
|
(7,146
|
)
|
|
Other assets
|
$
|
(3,158
|
)
|
|
$
|
121
|
|
|
$
|
(3,037
|
)
|
|
Consumer and customer deposits
|
$
|
(24,484
|
)
|
|
$
|
56,502
|
|
|
$
|
32,018
|
|
|
Accounts payable and accrued operating expenses
|
$
|
(4,218
|
)
|
|
$
|
(427
|
)
|
|
$
|
(4,645
|
)
|
|
Contract liabilities
(previously reported as Deferred revenue)
|
$
|
3,585
|
|
|
$
|
(605
|
)
|
|
$
|
2,980
|
|
|
Other current and long-term liabilities
|
$
|
(1,403
|
)
|
|
$
|
2,038
|
|
|
$
|
635
|
|
|
Net cash provided (used in ) by operating activities
|
$
|
(766,147
|
)
|
|
$
|
45,949
|
|
|
$
|
(720,198
|
)
|
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash
|
$
|
6,372
|
|
|
$
|
90
|
|
|
$
|
6,462
|
|
|
Increase (decrease) in cash, cash equivalents and restricted cash
|
$
|
(793,589
|
)
|
|
$
|
46,039
|
|
|
$
|
(747,550
|
)
|
|
Cash, cash equivalents and restricted cash—beginning of period
|
$
|
1,008,125
|
|
|
$
|
10,793
|
|
|
$
|
1,018,918
|
|
|
Cash, cash equivalents and restricted cash—end of period
|
$
|
214,536
|
|
|
$
|
56,832
|
|
|
$
|
271,368
|
|
In March 2018, the FASB issued ASU 2018-05 Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. ASU 2018-05 formally amended ASC Topic 740, Income Taxes (“ASC 740”) for the guidance previously provided by SEC Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance for the application of ASC 740 in the reporting period in which the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law. The Company
adopted SAB 118 in the fourth quarter of year-end 2017 and therefore, the Company’s subsequent adoption of ASU 2018-05 in the first quarter of year-end 2018 had no impact on its accounting for income taxes in the first quarter of year-end 2018. Additional information regarding the accounting for income taxes for the Tax Reform Act is contained in Note 8,
Income Taxes
.
Except for the adoption of ASU 2014-09, ASU 2016-18 and ASU 2018-05 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.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 changes the current lease accounting standard by requiring the recognition of lease assets and lease liabilities for all leases, including those currently classified as operating leases. This new guidance is to be applied under a modified retrospective application to the earliest reporting period presented for reporting periods beginning after December 15, 2018. Early adoption is permitted. We plan to adopt this guidance for our 2019 fiscal year. While management is evaluating the comprehensive impact of this guidance, this new guidance would require us to capitalize, at the appropriate discount rate, our operating lease commitments.
2
. Business Acquisitions
There were no acquisitions entered into during the first quarter of 2018. There were also no measurement period adjustments made in the first quarter of 2018. The measurement period for the rebates and incentives business acquired during the first quarter of 2017 is now closed.
3
. Financing
Credit Agreement
On January 11, 2018, we borrowed an additional
$75 million
in the form of a term loan under the Amended and Restated Credit Agreement, dated July 27, 2016, between the Company and lenders party thereto and Wells Fargo Bank, National Association as administrative agent (Credit Agreement), as further amended. The terms of the new term loan are substantially similar to the outstanding term loan.
On March 21, 2018, we repaid
$15 million
of the term loan outstanding under the amended Credit Agreement.
The following table presents the amounts due by maturity date of our term loan and convertible notes as of
March 24, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
March 24, 2018
|
|
2019
|
$
|
15,000
|
|
|
2020
|
30,000
|
|
|
2021
|
230,000
|
|
|
2022
|
500,000
|
|
|
Total long-term debt
|
$
|
775,000
|
|
As a result of the covenants in the amended Credit Agreement which require us to maintain certain leverage ratios of total debt to adjusted EBITDA (as defined in the amended Credit Agreement), and depending on our levels of adjusted EBITDA, we are limited in our ability to incur additional indebtedness either under the amended 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
March 24, 2018
,
December 30, 2017
and
March 25, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 24, 2018
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
$
|
43,236
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
43,236
|
|
|
Contingent asset
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,413
|
|
|
$
|
6,413
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,029
|
|
|
$
|
4,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
$
|
694,075
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
694,075
|
|
|
Contingent asset
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,131
|
|
|
$
|
6,131
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Warrants
|
$
|
—
|
|
|
$
|
20,000
|
|
|
$
|
—
|
|
|
$
|
20,000
|
|
|
Contingent consideration
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,886
|
|
|
$
|
3,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 25, 2017
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
$
|
4,073
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,073
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21,096
|
|
|
$
|
21,096
|
|
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.
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. 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.
During the
12 weeks ended
March 24, 2018
, there were no transfers between levels.
Term loan
—As of
March 24, 2018
, using Level 2 inputs, we estimate the fair value of our term loan (classified as
Note payable
on the balance sheet) to be approximately
$275.0 million
.
Convertible notes payable
—As of
March 24, 2018
, using Level 2 inputs, we estimate the fair value of our convertible notes payable to be approximately
$552.5 million
.
Contingent asset
—The changes in fair value of contingent asset for the the first quarter of 2018 is due to foreign currency translation adjustment.
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
12 weeks ended
March 24, 2018
and
March 25, 2017
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
12 weeks ended
|
|
|
March 24, 2018
|
|
March 25, 2017
|
|
Balance, beginning of period
|
$
|
3,886
|
|
|
$
|
23,752
|
|
|
Additions from acquisitions
|
—
|
|
|
2,000
|
|
|
Foreign currency translation adjustments
|
43
|
|
|
—
|
|
|
Change in fair value of contingent consideration
|
100
|
|
|
1,040
|
|
|
Settlement
|
—
|
|
|
(5,696
|
)
|
|
Balance, end of period
|
$
|
4,029
|
|
|
$
|
21,096
|
|
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.
As of
March 25, 2017
, related to our acquisition of 888extramoney.com LLC (“Extrameasures”),
$5.7 million
was estimated to be payable 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%
.
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
March 24, 2018
,
December 30, 2017
and
March 25, 2017
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 24, 2018
|
|
December 30, 2017
|
|
March 25, 2017
|
|
Other current assets:
|
|
|
|
|
|
|
Inventory
|
$
|
38,663
|
|
|
$
|
37,007
|
|
|
$
|
48,683
|
|
|
Deferred expenses
|
4,894
|
|
|
5,831
|
|
|
3,334
|
|
|
Income tax receivables
|
18,547
|
|
|
10,823
|
|
|
22,960
|
|
|
Contract asset
|
540
|
|
|
702
|
|
|
1,657
|
|
|
Other
|
68,451
|
|
|
64,912
|
|
|
44,313
|
|
|
Assets held for sale
|
27,206
|
|
|
23,462
|
|
|
44,951
|
|
|
Total other current assets
|
$
|
158,301
|
|
|
$
|
142,737
|
|
|
$
|
165,898
|
|
|
Other assets:
|
|
|
|
|
|
|
Deferred program and contract costs
|
$
|
118,819
|
|
|
$
|
60,000
|
|
|
$
|
48,678
|
|
|
Other receivables
|
11,265
|
|
|
9,235
|
|
|
1,475
|
|
|
Income tax receivables
|
2,323
|
|
|
2,321
|
|
|
2,358
|
|
|
Deferred financing costs
|
2,579
|
|
|
2,759
|
|
|
2,552
|
|
|
Contract asset
|
—
|
|
|
—
|
|
|
516
|
|
|
Other
|
50,753
|
|
|
47,352
|
|
|
35,587
|
|
|
Total other assets
|
$
|
185,739
|
|
|
$
|
121,667
|
|
|
$
|
91,166
|
|
|
Other current liabilities:
|
|
|
|
|
|
|
Payroll and related liabilities
|
$
|
34,693
|
|
|
$
|
43,022
|
|
|
$
|
28,198
|
|
|
Income taxes payable
|
1,841
|
|
|
8,056
|
|
|
3,860
|
|
|
Acquisition liability
|
2,329
|
|
|
4,012
|
|
|
9,047
|
|
|
Warrant liability
|
—
|
|
|
20,000
|
|
|
—
|
|
|
Other payables and accrued liabilities
|
15,353
|
|
|
25,292
|
|
|
9,836
|
|
|
Liabilities held for sale
|
2,237
|
|
|
2,441
|
|
|
34,710
|
|
|
Total other current liabilities
|
$
|
56,453
|
|
|
$
|
102,823
|
|
|
$
|
85,651
|
|
|
Other liabilities:
|
|
|
|
|
|
|
Contingent consideration
|
$
|
1,700
|
|
|
$
|
1,874
|
|
|
$
|
17,744
|
|
|
Income taxes payable
|
3,393
|
|
|
3,883
|
|
|
7,056
|
|
|
Contract liability
|
24,463
|
|
|
23,897
|
|
|
16,318
|
|
|
Other long-term liabilities
|
15,411
|
|
|
9,223
|
|
|
12,517
|
|
|
Total other liabilities
|
$
|
44,967
|
|
|
$
|
38,877
|
|
|
$
|
53,635
|
|
Assets held for sale
On October 9, 2017, the Board of Directors approved management’s plan to sell the Cardpool gift card exchange business. As we begin to actively market the Cardpool business, we may identify specific assets and liabilities to be retained by the Company. It is probable that such sale will occur within one year from the date of approval. As a result, beginning from the time the plan was approved, Cardpool’s assets and liabilities
were accounted for as held for sale and measured at the lower of its carrying value or fair value less cost to sell.
The following table presents the aggregate carrying amounts of the major classes of assets and liabilities as of
March 24, 2018
related to the Cardpool business (in thousands):
|
|
|
|
|
|
|
|
|
March 24, 2018
|
|
Other current assets
|
$
|
6,349
|
|
|
Property, equipment and technology, net
|
8,467
|
|
|
Goodwill
|
8,991
|
|
|
Intangible assets, net
|
431
|
|
|
Total assets
|
$
|
24,238
|
|
|
|
|
|
Accounts payable and accrued operating expenses
|
$
|
1,468
|
|
|
Other current liabilities
|
377
|
|
|
Contract liabilities
|
392
|
|
|
Total liabilities
|
$
|
2,237
|
|
During the first quarter of 2018, the Cardpool business recorded pre-tax loss of
$1.8 million
during the period it was accounted for as an asset held for sale.
Also included in Assets held for sale is
$3.0 million
related to a building in the UK that was held for sale as of
March 24, 2018
. The sale has since been completed.
6
. Goodwill
We have assigned goodwill to our U.S. Retail, Incentives & Rewards and International segments. To date, we have recorded goodwill impairment charges totaling
$31.5 million
and
$46.0 million
related to the Cardpool and Blackhawk Engagement Solutions reporting units respectively.
In March 2018, management became aware that a retail distribution partner in Germany will not be renewing its contract with us after the contract expires at the end of 2018. Accordingly, we performed a goodwill impairment test incorporating such information and determined that the fair value of the Europe East reporting unit exceeded its carrying value by
$19.1 million
, or
22%
. The fair value was determined using a combination of the income approach and the market approach. We believe that the income approach is the more reliable indication of value since it incorporates estimated revenues and earnings for the Europe East reporting unit that the market approach may not directly incorporate. Therefore, a weighting of
75%
was assigned to the income approach and a weighting of
25%
was assigned to the market approach. We continue to monitor the operating results and cash flows of our reporting units on a quarterly basis for indicators of goodwill impairment.
We also assessed the recoverability of the intangible asset related to the Germany retail distribution partner relationships as we concluded that an impairment indicator was present in the current quarter. As of March 24, 2018, the Germany retail distribution partner relationship intangible asset had a remaining carrying value of
$18.8 million
. The results of the recoverability test indicated that the estimate future undiscounted cash flows exceeded the carrying value of the asset, therefore no impairment was recorded during the quarter. We continue to monitor potential triggering events in our Europe East reporting unit.
A summary of changes in goodwill during the
12 weeks ended
March 24, 2018
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 24, 2018
|
|
|
U.S. Retail
|
|
Incentives & Rewards
|
|
International
|
|
Total
|
|
Balance, beginning of period
|
$
|
132,660
|
|
|
$
|
335,298
|
|
|
$
|
95,447
|
|
|
$
|
563,405
|
|
|
Foreign currency translation adjustments
|
—
|
|
|
(814
|
)
|
|
3,322
|
|
|
2,508
|
|
|
Balance, end of period
|
$
|
132,660
|
|
|
$
|
334,484
|
|
|
$
|
98,769
|
|
|
$
|
565,913
|
|
7
. Stock-Based Compensation
During the
12 weeks ended
March 24, 2018
, our Board of Directors granted
665,733
restricted stock units.
No
performance stock units were granted during
12 weeks ended
March 24, 2018
.
The following table presents total stock-based compensation expense according to the income statement line in our condensed consolidated statements of income (loss) for
12 weeks ended
March 24, 2018
and
March 25, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 weeks ended
|
|
|
|
March 24, 2018
|
|
March 25, 2017
|
|
|
Processing and services
|
$
|
1,779
|
|
|
$
|
1,702
|
|
|
|
Sales and marketing
|
2,558
|
|
|
2,812
|
|
|
|
Cost of products sold
|
16
|
|
|
17
|
|
|
|
General and administrative
|
3,709
|
|
|
3,870
|
|
|
|
Total stock-based compensation expense
|
$
|
8,062
|
|
|
$
|
8,401
|
|
|
8
. Income Taxes
On December 22, 2017, the Tax Reform Act was signed into law by the President of the United States. We recognized the income tax effects of the Tax Reform Act in our 2017 financial statements in accordance with SAB 118, subsequently codified by ASU 2018-05 (see Note 1,
The Company and Significant Accounting Policies, Recently Adopted Accounting Pronouncements)
, which provides guidance for the application of ASC 740 in the reporting period in which the Tax Reform Act was signed into law. The guidance addresses how a company recognizes provisional amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the Tax Reform Act.
As noted at year-end 2017 our accounting for the Tax Reform Act is incomplete, however, we were able to reasonably estimate certain effects and, therefore, recorded provisional adjustments associated with the Deemed Repatriation Transition Tax and are continuing to evaluate its impact on outside basis differences with respect to our foreign operations. Further, we are continuing to assess how to account for the global intangible low-taxed income of foreign subsidiaries from an accounting policy standpoint.
Our effective tax rates were
42.5%
and
41.1%
for the
12 weeks ended
March 24, 2018
and
March 25, 2017
, respectively. The increase in the effective tax rate for the
12 weeks ended
March 24, 2018
compared to the
12 weeks ended
March 25, 2017
was primarily due to current year U.S. taxation of certain income of our foreign subsidiaries and a discrete tax benefit related to an uncertain tax position (increasing the effective tax rate due to pre-tax loss), offset by a decrease in the U.S. federal corporate tax rate effective for our fiscal year ending December 29, 2018.
9
. Commitments and Contingencies
Distribution Partner Commitments
Our sales and marketing teams manage our relationships with our distribution partners and develop retail marketing programs and communication strategies to reach our consumers. We provide or fund product display fixtures and provide or coordinate merchandising visits intended to maintain in-stock conditions on the displays. We also manage or participate in the design of effective in-store marketing programs funded jointly by our distribution partners.
Future commitments to our distribution partners as of
March 24, 2018
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Distribution Partner Commitments
|
|
2018
|
$
|
62,088
|
|
|
2019
|
67,772
|
|
|
2020
|
50,458
|
|
|
2021
|
46,751
|
|
|
2022 and after
|
86,574
|
|
|
Distribution partner commissions (uncertainty in timing of future payments)
|
6,232
|
|
|
Total
|
$
|
319,875
|
|
Included above is
$130.0 million
which represents the maximum potential payments depending on performance under the arrangements. The estimated fair value of such commitments is approximately
$12.0 million
.
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 and other 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.
We have equity investments in various markets. With respect to one of our equity investments, we are currently in dispute and attempting to negotiate with certain of the investment partners regarding the future operations of such investment. The carrying value of such joint investment is
$8.8 million
as of
March 24, 2018
, which may be adjusted depending on the outcome of the negotiation attempts.
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 value added or other 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
$4.6 million
, primarily in a single jurisdiction. If we were to be assessed for this exposure, we believe it is probable that we will prevail.
10
. Segment Reporting
Our
three
reportable segments are U.S. Retail, Incentives & Rewards and International. 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
|
|
|
March 24, 2018
|
|
|
U.S. Retail
|
|
Incentives & Rewards
|
|
International
|
|
Consolidated
|
|
Total operating revenues
|
$
|
231,935
|
|
|
$
|
57,454
|
|
|
$
|
139,819
|
|
|
$
|
429,208
|
|
|
Partner distribution expense
|
130,190
|
|
|
5,027
|
|
|
83,232
|
|
|
218,449
|
|
|
Operating revenues, net of Partner distribution expense
|
101,745
|
|
|
52,427
|
|
|
56,587
|
|
|
210,759
|
|
|
Other operating expenses
|
108,777
|
|
|
59,076
|
|
|
61,989
|
|
|
229,842
|
|
|
Segment profit (loss) / Operating income (loss)
|
$
|
(7,032
|
)
|
|
$
|
(6,649
|
)
|
|
$
|
(5,402
|
)
|
|
$
|
(19,083
|
)
|
|
Other income (expense)
|
|
|
|
|
|
|
(8,010
|
)
|
|
Income (loss) before income tax expense
|
|
|
|
|
|
|
$
|
(27,093
|
)
|
|
Noncash charges
|
$
|
18,158
|
|
|
$
|
14,870
|
|
|
$
|
8,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 weeks ended
|
|
|
March 25, 2017
|
|
|
U.S. Retail
|
|
Incentives & Rewards
|
|
International
|
|
Consolidated
|
|
Total operating revenues
|
$
|
197,973
|
|
|
$
|
53,260
|
|
|
$
|
135,179
|
|
|
$
|
386,412
|
|
|
Partner distribution expense
|
97,978
|
|
|
3,856
|
|
|
73,289
|
|
|
175,123
|
|
|
Operating revenues, net of Partner distribution expense
|
99,995
|
|
|
49,404
|
|
|
61,890
|
|
|
211,289
|
|
|
Other operating expenses
|
108,604
|
|
|
56,827
|
|
|
69,175
|
|
|
234,606
|
|
|
Segment profit (loss) / Operating income (loss)
|
$
|
(8,609
|
)
|
|
$
|
(7,423
|
)
|
|
$
|
(7,285
|
)
|
|
$
|
(23,317
|
)
|
|
Other income (expense)
|
|
|
|
|
|
|
(6,107
|
)
|
|
Income (loss) before income tax expense
|
|
|
|
|
|
|
$
|
(29,424
|
)
|
|
Noncash charges
|
$
|
13,856
|
|
|
$
|
14,718
|
|
|
$
|
7,829
|
|
|
|
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
|
|
|
March 24, 2018
|
|
March 25, 2017
|
|
|
Basic
|
|
Diluted
|
|
Basic
|
|
Diluted
|
|
Net income (loss) attributable to common stockholders
|
$
|
(15,767
|
)
|
|
$
|
(15,767
|
)
|
|
$
|
(17,465
|
)
|
|
$
|
(17,465
|
)
|
|
Weighted-average common shares outstanding
|
56,477
|
|
|
56,477
|
|
|
55,904
|
|
|
55,904
|
|
|
Common share equivalents
|
|
|
—
|
|
|
|
|
|
—
|
|
|
Weighted-average shares outstanding
|
|
|
56,477
|
|
|
|
|
55,904
|
|
|
Earnings (loss) per share
|
$
|
(0.28
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(0.31
|
)
|
The weighted-average common shares outstanding for diluted EPS for the
12 weeks ended
March 24, 2018
and
March 25, 2017
, excluded approximately
4,378,000
and
5,307,000
, respectively, of total potential common stock outstanding because the effect would have been anti-dilutive.