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.
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, 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.
We will adopt this new guidance using the full retrospective method in the first quarter of fiscal 2018 to restate each prior reporting period presented. While we are continuing to evaluate the impacts of this new guidance on our consolidated financial statements, including disclosures, we have identified the following areas that will be affected by the adoption of this new standard:
Revenue
Content Provider Commissions—
Under the new guidance, we will continue to recognize content provider commissions as revenue at the time of card activation, as 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 current 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 track and redeem cards, 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 long term. Under current 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. There may be changes to the classification of program management fees and breakage revenue from
Program and other fees
to
Commission and fees
within
Total Operating Revenue.
Rebate Processing Fees—
While we expect the recognition of revenue for rebates fulfilled by checks or closed loop cards to remain unchanged under the new guidance, the new guidance will require us to 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.
Incentive Merchandise Rewards—
The adoption of the new guidance is expected to classify certain incentive merchandise rewards costs as a reduction to revenue versus a cost of products sold. Under the new accounting guidance, 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 open loop incentive cards will predominantly be recognized 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. Under current GAAP, we defer these expenses and amortize them based on the redemption pattern of the card.
Processing and Services—
Under the new guidance, processing and services costs, card production and upfront transaction processing fees for the Visa gift card and open loop incentive cards will predominantly be recognized 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. Under current 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 will result in additional capitalized commissions which will be amortized over a longer term than our current policy.
As part of our assessment and implementation plan, we are also evaluating and making changes to our policies, procedures and internal controls. We continue to evaluate the impact of this new guidance on the Company, including any impacts on purchase accounting or intangibles assets from our recent acquisitions. We expect to continue providing relevant information prior to adoption.
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 to reduce the complexity of calculating goodwill impairment. During the third quarter of 2017, we recognized a
$9.0 million
goodwill impairment charge related to our Cardpool reporting unit, reducing the carrying value of goodwill to
$31.5 million
. See
Note 6
—
Goodwill
for additional information on this charge.
Significant Accounting Policies
Except for Cardpool 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 Acquisitions
CashStar
On August 29, 2017, we acquired CashStar, Inc. and its subsidiaries (collectively “CashStar”), for
$166.0 million
in cash. CashStar provides a digital commerce platform for the sales, marketing and distribution of digital and physical gift cards. This acquisition strengthens our position in the emerging digital gift card market and establishes our Company as a leading provider in the fast-growing, first-party digital gift card market. We financed the purchase using cash on hand and approximately
$110 million
of borrowings under our Restated Credit Agreement (See
Note 3
—
Financing
). We accounted for this acquisition as a business combination.
The following table presents our initial estimates of the purchase price allocation. We may make adjustments to these amounts through the measurement period as we finalize information regarding our forecasts, valuation assumptions and income taxes (in thousands):
|
|
|
|
|
Cash and cash equivalents
|
$
|
14,469
|
|
Restricted cash
|
7,820
|
|
Settlement receivables, net
|
2,815
|
|
Identifiable technology and intangible assets
|
89,132
|
|
Goodwill
|
95,387
|
|
Other tangible assets, net
|
1,570
|
|
Settlement payables
|
(7,852
|
)
|
Consumer and customer deposits
|
(11,779
|
)
|
Accounts payable and accrued operating expenses
|
(7,025
|
)
|
Debt assumed
|
(8,285
|
)
|
Deferred income taxes
|
(10,256
|
)
|
Total purchase consideration
|
$
|
165,996
|
|
Deferred income taxes include
$32.7 million
of deferred tax liabilities for nondeductible amortization of identifiable technology and intangible assets,
$20.2 million
of deferred tax assets for net operating loss carryforwards, and
$2.2 million
for other deferred tax assets, net.
At closing, we repaid the assumed debt, which we present in financing activities in our condensed consolidated statements of cash flows. We also paid
$3.2 million
of CashStar's transaction expenses included above within accounts payable and accrued operating expenses, which we present in operating activities in our condensed consolidated statements of cash flows.
Goodwill represents the value of the future cash flows from new customers and the value of the assembled workforce. Goodwill is not expected to be deductible for income tax purposes.
The following table summarizes the components of the identifiable technology and intangible assets and their estimated useful lives at the acquisition date (dollars in thousands):
|
|
|
|
|
|
|
|
Fair Value
|
|
Useful Life
|
Customer relationships
|
$
|
87,132
|
|
|
5 years
|
Technology
|
2,000
|
|
|
1.5 years
|
Total identifiable technology and intangible assets
|
$
|
89,132
|
|
|
|
Customer relationships represent the estimated fair value of the underlying relationships and agreements with CashStar's business clients. Technology consists of CashStar's internally-developed software.
Pro forma financial information
The following table summarizes the combined pro forma results of operations of us and CashStar as though we have been combined as of the beginning of fiscal 2016 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
36 weeks ended
|
|
September 9, 2017
|
|
September 10, 2016
|
|
(Unaudited)
|
Total revenues
|
$
|
1,317,226
|
|
|
$
|
1,139,796
|
|
Net loss attributable to Blackhawk Network Holdings, Inc.
|
$
|
(35,782
|
)
|
|
$
|
(30,846
|
)
|
Pro forma EPS—Basic
|
$
|
(0.63
|
)
|
|
$
|
(0.55
|
)
|
Pro forma EPS—Diluted
|
$
|
(0.63
|
)
|
|
$
|
(0.55
|
)
|
The pro forma financial information includes adjustments to reclassify acquisition-related costs from 2017 to 2016, to amortize technology and intangible assets starting at the beginning of 2016, to reflect the impact on revenue resulting from the step-down in basis of deferred revenue from its book value to its fair value as of the beginning of 2016 and to increase interest expense assuming the related financing had been applied to the beginning of 2016. The pro forma financial information is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of 2016.
We have not presented separate results of operations since closing of us and the acquisition since the beginning of fiscal 2016, as results of operations for the acquisition are immaterial.
Acquisition-related expenses totaled
$0.4 million
, which we report in
Transition and acquisition
expense.
Other Acquisitions
During the first quarter of 2017, we completed an acquisition of a rebates and incentives business. During the third quarter of 2017, we acquired certain assets of a full-service recognition and reward provider with operations primarily in Australia.
The purchase consideration for these acquisitions totaled approximately
$30.1 million
, which includes
$27.6 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, and
$0.9 million
relating to working capital adjustments. In aggregate,
$8.3 million
cash was acquired, and based on our initial estimate of the purchase price allocation,
$15.5 million
was attributed to intangible assets,
$13.1 million
was attributed to goodwill, and
$6.8 million
was attributed to net tangible liabilities acquired.
For the intangible assets acquired, customer relationships have an average useful life ranging from
7
to
10
years.
We expect to deduct
$9.9 million
of goodwill and
$7.8 million
of 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 these acquisitions since the beginning of fiscal 2016, as results of operations for these acquisitions are immaterial.
Acquisition-related expenses totaled
$0.4 million
, which we report in
Transition and acquisition
expense.
2016 Acquisitions
On October 6, 2016, we acquired all of the outstanding common stock of The Grass Roots Group Holdings Limited and its subsidiaries (collectively, “Grass Roots”) for total purchase consideration of
£93.9 million
, or
$119.3 million
based on the exchange rate on the acquisition date. Grass Roots is a leading provider of employee and customer engagement solutions, and the acquisition broadens the global capabilities of our incentives and rewards businesses.
The acquisition was funded using a combination of cash on hand and borrowings under our Credit Agreement. The purchase consideration included
£87.2 million
, or
$110.8 million
, in cash and an additional
£6.7 million
, or
$8.5 million
, related to the Grass Roots Employee Benefit Trust (“GREBT”), which we include in our consolidated financial statements. At closing, we paid
$0.6 million
for transaction expenses.
During the second quarter of 2017, we recorded a measurement period adjustment for 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.
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.
On August 28, 2017, we entered into the second amendment to the Restated Credit Agreement which, among other things, modified the definition of Consolidated EBITDA. As a result, we can access an increased portion of the available lending commitments to fund permitted acquisitions and for other corporate purposes under the Restated Credit Agreement.
The following table presents the amounts due by maturity date of our term loan and convertible notes as of
September 9, 2017
(in thousands):
|
|
|
|
|
|
September 9, 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
September 9, 2017
,
December 31, 2016
and
September 10, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 9, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
Money market mutual funds
|
$
|
75
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
75
|
|
Liabilities
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,792
|
|
|
$
|
14,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 10, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
Money market mutual funds
|
$
|
5,112
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,112
|
|
Liabilities
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,200
|
|
|
$
|
22,200
|
|
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.
During the
36 weeks ended
September 9, 2017
, there were no transfers between levels.
Term loan
—As of
September 9, 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
September 9, 2017
, using Level 2 inputs, we estimate the fair value of our convertible notes payable to be approximately
$565.0 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
36 weeks ended
September 9, 2017
and
September 10, 2016
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
36 weeks ended
|
|
September 9, 2017
|
|
September 10, 2016
|
Balance, beginning of period
|
$
|
23,752
|
|
|
$
|
—
|
|
Additions from acquisitions (see
Note 2—Business Acquisitions
)
|
1,640
|
|
|
20,100
|
|
Change in fair value of contingent consideration
|
(5,097
|
)
|
|
2,100
|
|
Settlement
|
(5,503
|
)
|
|
—
|
|
Balance, end of period
|
$
|
14,792
|
|
|
$
|
22,200
|
|
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
36 weeks ended
September 9, 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%
.
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
September 9, 2017
,
December 31, 2016
and
September 10, 2016
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 9, 2017
|
|
December 31, 2016
|
|
September 10, 2016
|
Other current assets:
|
|
|
|
|
|
Inventory
|
$
|
40,124
|
|
|
$
|
43,950
|
|
|
$
|
35,634
|
|
Deferred expenses
|
19,194
|
|
|
22,148
|
|
|
12,099
|
|
Income tax receivables
|
41,393
|
|
|
13,599
|
|
|
38,427
|
|
Other
|
44,159
|
|
|
51,678
|
|
|
37,759
|
|
Assets held for sale
|
46,821
|
|
|
—
|
|
|
—
|
|
Total other current assets
|
$
|
191,691
|
|
|
$
|
131,375
|
|
|
$
|
123,919
|
|
Other assets:
|
|
|
|
|
|
Deferred program and contract costs
|
$
|
38,820
|
|
|
$
|
48,066
|
|
|
$
|
44,388
|
|
Other receivables
|
1,646
|
|
|
2,713
|
|
|
1,390
|
|
Income tax receivables
|
2,270
|
|
|
2,358
|
|
|
—
|
|
Deferred financing costs
|
2,999
|
|
|
2,688
|
|
|
2,871
|
|
Other
|
40,875
|
|
|
30,031
|
|
|
20,390
|
|
Total other assets
|
$
|
86,610
|
|
|
$
|
85,856
|
|
|
$
|
69,039
|
|
Other current liabilities:
|
|
|
|
|
|
Payroll and related liabilities
|
$
|
28,920
|
|
|
$
|
24,944
|
|
|
$
|
25,425
|
|
Income taxes payable
|
4,994
|
|
|
4,199
|
|
|
3,158
|
|
Acquisition liability
|
5,983
|
|
|
6,672
|
|
|
11,250
|
|
Other payables and accrued liabilities
|
10,509
|
|
|
15,361
|
|
|
8,797
|
|
Liabilities held for sale
|
24,398
|
|
|
—
|
|
|
—
|
|
Total other current liabilities
|
$
|
74,804
|
|
|
$
|
51,176
|
|
|
$
|
48,630
|
|
Other liabilities:
|
|
|
|
|
|
Contingent consideration
|
$
|
9,800
|
|
|
$
|
17,080
|
|
|
$
|
10,950
|
|
Income taxes payable
|
4,595
|
|
|
6,957
|
|
|
6,213
|
|
Deferred income and other liabilities
|
12,249
|
|
|
15,616
|
|
|
8,266
|
|
Total other liabilities
|
$
|
26,644
|
|
|
$
|
39,653
|
|
|
$
|
25,429
|
|
Assets held for sale
During the third quarter of 2017, the Company recorded an impairment charge to reduce the carrying value of the Cardpool reporting unit to its estimated fair value. See
Note 6
—
Goodwill
for additional information on this charge.
On October 9, 2017, subsequent to the end of the third quarter of 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. As a result, beginning from the time the plan was approved, Cardpool’s assets and liabilities
will be accounted for as held for sale and measured at the lower of its carrying value or fair value less cost to sell. If it is determined, as a result of our selling efforts, that the carrying value of the net assets to be sold is higher than the expected selling price less the costs to sell, additional impairment
charges will be recorded.
The following table presents the aggregate carrying amounts of the major classes of assets and liabilities as of
September 9, 2017
related to the Cardpool business (in thousands):
|
|
|
|
|
|
September 9, 2017
|
Other current assets
|
$
|
5,708
|
|
Property, equipment and technology, net
|
7,097
|
|
Goodwill
|
31,491
|
|
Intangible assets, net
|
431
|
|
Total assets
|
$
|
44,727
|
|
|
|
Accounts payable and accrued operating expenses
|
$
|
1,479
|
|
Other current liabilities
|
503
|
|
Deferred revenue
|
167
|
|
Total liabilities
|
$
|
2,149
|
|
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.
The following table presents the aggregate carrying amounts of the major classes of assets and liabilities related to the M&E business as of
September 9, 2017
(in thousands):
|
|
|
|
|
|
September 9, 2017
|
Accounts receivable, net
|
$
|
9,737
|
|
Other current assets
|
3,002
|
|
Property, equipment and technology, net
|
490
|
|
Intangible assets, net
|
6,173
|
|
Goodwill
|
26,303
|
|
Deferred income taxes
|
1,116
|
|
Total assets held for sale
|
$
|
46,821
|
|
|
|
Settlement payables
|
$
|
7,061
|
|
Consumer and customer deposits
|
1,812
|
|
Accounts payable and accrued operating expenses
|
3,135
|
|
Deferred revenue
|
1,784
|
|
Other current liabilities
|
10,493
|
|
Deferred income taxes
|
113
|
|
Total liabilities held for sale
|
$
|
24,398
|
|
During the first three quarters of 2017, the M&E business recorded pre-tax income of
$1.6 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. 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 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.
We had performed our annual review of goodwill balances for impairment as of September 11, 2016. For the Cardpool reporting unit, we performed both a qualitative and quantitative assessment of goodwill impairment and determined that Cardpool 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. Based on this assessment, the fair value of the Cardpool reporting unit exceeded its carrying value by
$3.4 million
, or
6.9%
.
Subsequent to the annual goodwill impairment assessment performed in the fourth quarter of 2016, we continued to monitor the actual performance of Cardpool and determined the fair value of Cardpool was not less than its carrying value for the first and second quarter of fiscal 2017. During the third quarter of 2017, we determined that there were indicators present to suggest that it was more likely than not that the fair value of the Cardpool reporting unit was less than its carrying amount. The significant changes for the Cardpool reporting unit, subsequent to the annual goodwill impairment test performed in the fourth quarter of 2016, included a decline in forecasted operating revenues, operating income and cash flows. To test for impairment, we estimated the fair value of the Cardpool reporting unit under the income approach, discounting estimated future cash flows using a weighted-average cost of capital, based on a rate of return available from similar, alternative investments and reflecting the inherent risks associated with the estimated cash flows. To reduce the carrying value to its estimated fair value, we recorded an impairment charge of
$9.0 million
during the third quarter of 2017, reducing the carrying value of Cardpool goodwill to
$31.5 million
.
On October 9, 2017, subsequent to the end of the third quarter of 2017, the Board of Directors approved management’s plan to sell the Cardpool gift card exchange business. If it is determined, as a result of our selling efforts, that the carrying value of the net assets to be sold is higher than the expected selling price less the costs to sell, additional impairment
charges will be recorded.
See
Note 5
—
Consolidated Financial Statement Details
for additional information.
A summary of changes in goodwill during the
36 weeks ended
September 9, 2017
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 9, 2017
|
|
U.S. Retail
|
|
Incentives & Rewards
|
|
International
|
|
Total
|
Balance, beginning of period
|
$
|
99,685
|
|
|
$
|
366,508
|
|
|
$
|
104,205
|
|
|
$
|
570,398
|
|
Goodwill impairment
|
(9,000
|
)
|
|
—
|
|
|
—
|
|
|
(9,000
|
)
|
Re-allocation of international Incentives goodwill
|
—
|
|
|
(7,152
|
)
|
|
7,152
|
|
|
—
|
|
Re-allocation of e-commerce goodwill
|
(10,505
|
)
|
|
10,505
|
|
|
—
|
|
|
—
|
|
Acquisitions (see
Note 2—Business Acquisitions
)
|
—
|
|
|
105,306
|
|
|
3,153
|
|
|
108,459
|
|
Measurement period of adjustments for 2016 acquisitions
|
338
|
|
|
—
|
|
|
(1,384
|
)
|
|
(1,046
|
)
|
Asset held for sale (see
Note 5—Consolidated Financial Statement Details
)
|
—
|
|
|
—
|
|
|
(26,303
|
)
|
|
(26,303
|
)
|
Foreign currency translation adjustments
|
—
|
|
|
2,344
|
|
|
11,414
|
|
|
13,758
|
|
Balance, end of period
|
$
|
80,518
|
|
|
$
|
477,511
|
|
|
$
|
98,237
|
|
|
$
|
656,266
|
|
7
. Stock-Based Compensation
During the
36 weeks ended
September 9, 2017
, our Board of Directors granted
1,024,169
restricted stock units and
200,700
performance stock units.
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
12 weeks ended
and
36 weeks ended
September 9, 2017
and
September 10, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 weeks ended
|
|
36 weeks ended
|
|
September 9, 2017
|
|
September 10, 2016
|
|
September 9, 2017
|
|
September 10, 2016
|
Processing and services
|
$
|
1,681
|
|
|
$
|
1,401
|
|
|
$
|
5,181
|
|
|
$
|
4,365
|
|
Sales and marketing
|
2,705
|
|
|
2,759
|
|
|
8,401
|
|
|
8,600
|
|
Cost of products sold
|
14
|
|
|
31
|
|
|
35
|
|
|
89
|
|
General and administrative
|
3,709
|
|
|
4,102
|
|
|
10,943
|
|
|
11,811
|
|
Total stock-based compensation expense
|
$
|
8,109
|
|
|
$
|
8,293
|
|
|
$
|
24,560
|
|
|
$
|
24,865
|
|
8
. Income Taxes
Our effective tax rates were
61.0%
and
62.3%
for the
12 weeks ended
September 9, 2017
and
September 10, 2016
, respectively, and
49.1%
and
48.8%
for the
36 weeks ended
September 9, 2017
and
September 10, 2016
, respectively. The decrease in the effective tax rate for the
12 weeks ended
September 9, 2017
compared to the
12 weeks ended
September 10, 2016
was primarily due to prior year discrete tax benefit for a tax return to provision true-up, compared to a current year discrete tax benefit related to an uncertain tax position. The increase in the effective tax rate for the
36 weeks ended
September 9, 2017
compared to the
36 weeks ended
September 10, 2016
was primarily due to a current year discrete tax benefit related to an uncertain tax position and excess tax benefits of employee stock-based compensation (both increasing the effective tax rate due to pre-tax loss), compared to a prior year discrete tax benefit for a tax return to provision true-up.
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 representative of the selling stockholders of CardLab, Inc. filed a lawsuit against us in the Delaware Chancery Court (the “Court”) (CardLab, Inc. v. Blackhawk Network Holdings, Inc., Case No. 10851). The complaint generally alleged that we failed to disclose material information relating to a potential earn-out payment in connection with our acquisition of CardLab, Inc. in 2014. On August 8, 2017, the parties agreed to dismiss the action in its entirety with prejudice. Accordingly, the parties filed a Stipulation of Dismissal, which was granted on August 15, 2017, dismissing all claims with prejudice.
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
$5.1 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. 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, compliance, 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
|
|
September 9, 2017
|
|
U.S. Retail
|
|
Incentives & Rewards
|
|
International
|
|
Consolidated
|
Total operating revenues
|
$
|
204,420
|
|
|
$
|
80,671
|
|
|
$
|
134,168
|
|
|
$
|
419,259
|
|
Partner distribution expense
|
115,565
|
|
|
5,521
|
|
|
75,547
|
|
|
196,633
|
|
Operating revenues, net of Partner distribution expense
|
88,855
|
|
|
75,150
|
|
|
58,621
|
|
|
222,626
|
|
Other operating expenses
|
100,527
|
|
|
76,382
|
|
|
58,418
|
|
|
235,327
|
|
Segment profit (loss) / Operating income (loss)
|
$
|
(11,672
|
)
|
|
$
|
(1,232
|
)
|
|
$
|
203
|
|
|
$
|
(12,701
|
)
|
Other income (expense)
|
|
|
|
|
|
|
(6,743
|
)
|
Income (loss) before income tax expense
|
|
|
|
|
|
|
$
|
(19,444
|
)
|
Noncash charges
|
$
|
22,324
|
|
|
$
|
12,953
|
|
|
$
|
8,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 weeks ended
|
|
September 10, 2016
|
|
U.S. Retail
|
|
Incentives & Rewards
|
|
International
|
|
Consolidated
|
Total operating revenues
|
$
|
195,878
|
|
|
$
|
63,803
|
|
|
$
|
101,879
|
|
|
$
|
361,560
|
|
Partner distribution expense
|
103,473
|
|
|
4,996
|
|
|
69,894
|
|
|
178,363
|
|
Operating revenues, net of Partner distribution expense
|
92,405
|
|
|
58,807
|
|
|
31,985
|
|
|
183,197
|
|
Other operating expenses
|
89,768
|
|
|
65,981
|
|
|
37,541
|
|
|
193,290
|
|
Segment profit (loss) / Operating income (loss)
|
$
|
2,637
|
|
|
$
|
(7,174
|
)
|
|
$
|
(5,556
|
)
|
|
$
|
(10,093
|
)
|
Other income (expense)
|
|
|
|
|
|
|
(3,324
|
)
|
Income (loss) before income tax expense
|
|
|
|
|
|
|
$
|
(13,417
|
)
|
Noncash charges
|
$
|
10,070
|
|
|
$
|
22,148
|
|
|
$
|
4,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36 weeks ended
|
|
September 9, 2017
|
|
U.S. Retail
|
|
Incentives & Rewards
|
|
International
|
|
Consolidated
|
Total operating revenues
|
$
|
649,763
|
|
|
$
|
224,598
|
|
|
$
|
415,280
|
|
|
$
|
1,289,641
|
|
Partner distribution expense
|
342,041
|
|
|
16,257
|
|
|
219,336
|
|
|
577,634
|
|
Operating revenues, net of Partner distribution expense
|
307,722
|
|
|
208,341
|
|
|
195,944
|
|
|
712,007
|
|
Other operating expenses
|
321,138
|
|
|
219,130
|
|
|
205,872
|
|
|
746,140
|
|
Segment profit (loss) / Operating income (loss)
|
$
|
(13,416
|
)
|
|
$
|
(10,789
|
)
|
|
$
|
(9,928
|
)
|
|
$
|
(34,133
|
)
|
Other income (expense)
|
|
|
|
|
|
|
(19,234
|
)
|
Income (loss) before income tax expense
|
|
|
|
|
|
|
$
|
(53,367
|
)
|
Noncash charges
|
$
|
49,600
|
|
|
$
|
40,652
|
|
|
$
|
24,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36 weeks ended
|
|
September 10, 2016
|
|
U.S. Retail
|
|
Incentives & Rewards
|
|
International
|
|
Consolidated
|
Total operating revenues
|
$
|
648,982
|
|
|
$
|
184,576
|
|
|
$
|
285,670
|
|
|
$
|
1,119,228
|
|
Partner distribution expense
|
329,827
|
|
|
13,045
|
|
|
198,877
|
|
|
541,749
|
|
Operating revenues, net of Partner distribution expense
|
319,155
|
|
|
171,531
|
|
|
86,793
|
|
|
577,479
|
|
Other operating expenses
|
304,212
|
|
|
196,122
|
|
|
105,259
|
|
|
605,593
|
|
Segment profit (loss) / Operating income (loss)
|
$
|
14,943
|
|
|
$
|
(24,591
|
)
|
|
$
|
(18,466
|
)
|
|
$
|
(28,114
|
)
|
Other income (expense)
|
|
|
|
|
|
|
(10,610
|
)
|
Income (loss) before income tax expense
|
|
|
|
|
|
|
$
|
(38,724
|
)
|
Noncash charges
|
$
|
35,313
|
|
|
$
|
60,449
|
|
|
$
|
14,267
|
|
|
|
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
|
|
September 9, 2017
|
|
September 10, 2016
|
|
Basic
|
|
Diluted
|
|
Basic
|
|
Diluted
|
Net income (loss) attributable to Blackhawk Network Holdings, Inc.
|
$
|
(7,766
|
)
|
|
$
|
(7,766
|
)
|
|
$
|
(5,102
|
)
|
|
$
|
(5,102
|
)
|
Distributed and undistributed earnings allocated to participating securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income (loss) attributable to common stockholders
|
$
|
(7,766
|
)
|
|
$
|
(7,766
|
)
|
|
$
|
(5,102
|
)
|
|
$
|
(5,102
|
)
|
Weighted-average common shares outstanding
|
56,709
|
|
|
56,709
|
|
|
55,668
|
|
|
55,668
|
|
Common share equivalents
|
|
|
—
|
|
|
|
|
|
—
|
|
Weighted-average shares outstanding
|
|
|
56,709
|
|
|
|
|
55,668
|
|
Earnings (loss) per share
|
$
|
(0.14
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36 weeks ended
|
|
September 9, 2017
|
|
September 10, 2016
|
|
Basic
|
|
Diluted
|
|
Basic
|
|
Diluted
|
Net income (loss) attributable to Blackhawk Network Holdings, Inc.
|
$
|
(27,603
|
)
|
|
$
|
(27,603
|
)
|
|
$
|
(19,992
|
)
|
|
$
|
(19,992
|
)
|
Distributed and undistributed earnings allocated to participating securities
|
—
|
|
|
—
|
|
|
(15
|
)
|
|
(15
|
)
|
Net income (loss) attributable to common stockholders
|
$
|
(27,603
|
)
|
|
$
|
(27,603
|
)
|
|
$
|
(20,007
|
)
|
|
$
|
(20,007
|
)
|
Weighted-average common shares outstanding
|
56,355
|
|
|
56,355
|
|
|
55,851
|
|
|
55,851
|
|
Common share equivalents
|
|
|
—
|
|
|
|
|
—
|
|
Weighted-average shares outstanding
|
|
|
56,355
|
|
|
|
|
55,851
|
|
Earnings (loss) per share
|
$
|
(0.49
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
(0.36
|
)
|
The weighted-average common shares outstanding for diluted EPS for the
12 weeks ended
September 9, 2017
and
September 10, 2016
, excluded approximately
4,770,000
and
6,266,000
, respectively, and for the
36 weeks ended
September 9, 2017
and
September 10, 2016
, excluded approximately
5,041,000
and
5,971,000
, respectively, of total potential common stock outstanding because the effect would have been anti-dilutive.