OREANDA-NEWS. July 20, 2016. Blackhawk Network Holdings, Inc. (NASDAQ:HAWK) today announced financial results for the second quarter ended June 18, 2016.

\\$ in millions except per share amounts Q2’16 Q2’15 % Change
(unaudited)      
Operating Revenues \\$391.2  \\$372.2   5%
Net Income (Loss) \\$(11.3) \\$2.9  N/M
Diluted Earnings (Loss) Per Share \\$(0.20) \\$0.05  N/M
 

Non-GAAP Measures (see Tables 2 and 3)

\\$ in millions except per share amounts (unaudited) Q2’16 Q2’15 % Change
(unaudited)      
Adjusted Operating Revenues \\$183.7  \\$167.2   10%
Adjusted EBITDA \\$26.4  \\$30.6   (14)%
Adjusted Net Income \\$21.0  \\$24.3   (14)%
Adjusted Diluted EPS \\$0.37  \\$0.43   (14)%
 

“Solid performance in our incentives and international segments, coupled with a slightly lower than forecast EMV impact on the U.S. retail segment, resulted in profitability in the second quarter well above our guidance range,” commented CEO and president Talbott Roche. “The EMV impact caused U.S. retail adjusted operating revenues to decline 10% compared to last year’s second quarter. On the other hand, international retail recorded adjusted operating revenues growth of 17% during the second quarter, driven by strong growth in Europe. In our incentives segment, adjusted operating revenues grew 70%, driven by the acquisitions of Achievers in the second half of 2015 and Giftcards.com early in the first quarter of 2016. We continue to believe that the negative impact of EMV on US Retail is largely a 2016 event.”

The company’s second quarter adjusted operating revenues, adjusted EBITDA, and adjusted net income continued to be impacted negatively from the delay in EMV(1) implementation by a number of the Company’s U.S. grocery distribution partners and the related measures those partners have taken to limit credit card purchases of prepaid products. For the second quarter of 2016, the estimated impact related to EMV was \\$14 million on adjusted operating revenues and \\$12 million on adjusted EBITDA.

CFO Jerry Ulrich added, “Adjusted EBITDA declined 14% for total Blackhawk and declined 18% for the U.S. retail segment during the second quarter of 2016 reflecting the full quarter impact of EMV.  Adjusted EBITDA growth in the international and incentives segments was 278% and 79%, respectively, which was offset by the decline in the U.S. retail segment.  Unallocated expenses grew 12% during the second quarter."

GAAP financial results for the second quarter of 2016 compared to the second quarter of 2015

  • Operating revenues totaled \\$391.2 million, an increase of 5% from \\$372.2 million for the quarter ended June 20, 2015.  This increase was due to a 2% increase in commissions and fees driven primarily by higher international sales volume; a 29% increase in program and other fees due to higher incentive open loop gift card sales and the addition of Achievers and Giftcards.com; a 16% increase in product sales primarily due to the addition of Achievers and higher telecom handset sales, partially offset by a decline at Cardpool; and a decrease of 26% in marketing revenues due to lower international promotional revenues.
  • Net loss totaled \\$11.3 million compared to net income of \\$2.9 million for the quarter ended June 20, 2015.  The decrease was driven primarily by lower sales of U.S. retail open loop gift cards due to EMV restrictions, higher non-cash acquisition-related expenses, higher non-cash stock compensation expense and increased interest expense. 
  • Net loss per diluted share was \\$0.20 compared to earnings per diluted share of \\$0.05 for the quarter ended June 20, 2015.  Diluted shares outstanding increased 0.4% to 56.1 million.

Non-GAAP financial results for the second quarter of 2016 compared to the second quarter of 2015 (see Table 2 for Reconciliation of Non-GAAP Measures)

  • Adjusted operating revenues totaled \\$183.7 million, an increase of 10% from \\$167.2 million for the quarter ended June 20, 2015.  The increase was driven primarily by higher revenue from the incentives segment including the acquisitions of Achievers and Giftcards.com, offset by lower revenues in U.S. retail due to EMV-related sales restrictions on U.S. retail open loop gift card sales.
  • Adjusted EBITDA totaled \\$26.4 million, a decrease of 14% from \\$30.6 million for the quarter ended June 20, 2015.  Lower open loop gift card sales offset growth in the international retail and incentives segments.
  • Adjusted net income totaled \\$21.0 million, a decrease of 14% from \\$24.3 million for the quarter ended June 20, 2015.  Excluding the impact of the reduction in income taxes payable, adjusted net income was \\$7.2 million, a decrease of 39% from \\$11.8 million for the quarter ended June 20, 2015 reflecting the lower Adjusted EBITDA and higher interest expense.
  • Adjusted diluted EPS was \\$0.37, a decrease of 14% from \\$0.43 for the quarter ended June 20, 2015.  Excluding the impact of the reduction in income taxes payable, adjusted diluted EPS was \\$0.13.

(1) Reference to “EMV impact” refers to our estimates of the impact on our revenues and earnings of measures taken by some retail distribution partners related to their delay in implementing the new secure payment card requirements from Europay, Mastercard and Visa (“EMV" mandate).   The failure to implement EMV in their point-of-sale systems by October 2015 transferred the liability for fraudulent credit card payments from card issuers to the retailers.   In order to limit chargebacks related to fraudulent credit cards used to purchase certain prepaid products in their stores, some of our distribution partners began taking measures in late January 2016 to limit or control the sale of high value prepaid cards and in particular, open loop products.  While the type of restrictive measures have varied by distribution partner, the following types of restrictions have been implemented:  establishment of credit limits on credit card purchases of gift cards, a move to cash or debit only for purchases of certain gift cards and removal of high denomination open loop products.

Future Change in Non-GAAP Measures of Adjusted Net Income and Adjusted Diluted Earnings per Share

Beginning the third quarter of 2016, in response to the SEC’s Compliance and Disclosure Interpretations published on May 17, 2016 pertaining to non-GAAP measures, the Company will revise its presentation of two non-GAAP measures, Adjusted Net Income and Adjusted Diluted Earnings per Share.  The reduction in income taxes payable previously included in the determination of Adjusted Net Income will no longer be included, but will be provided separately including the per-share amount of the reductions.  Table 2 of this earnings release displays the current presentation of Adjusted Net Income and Adjusted Diluted Earnings per Share.  Table 3 of this earnings release displays the revised presentation of Adjusted Net Income and Adjusted Diluted Earnings per Share.

A revised presentation of Adjusted Net Income and Adjusted Diluted Earnings per Share for prior periods from fiscal 2013 forward is available on the Company’s investor relations website at ir.blackhawknetwork.com.

2016 Guidance

Guidance for fiscal 2016 provided in the table below reflects updated assumptions and estimates regarding each of the Company’s various operating businesses and shared services resources as compared to the guidance provided on April 26, 2016.  The updated 2016 full year guidance includes a revised estimate of the negative impact related to certain of our distribution partners’ EMV non-compliance as described above vs. 2015 of \\$47 million on Adjusted Operating Revenues and \\$40 million on Adjusted EBITDA.

Further details regarding the Company’s guidance including a breakdown of guidance for the third fiscal quarter will be provided on the earnings call.

\\$ in millions except per share amounts 2016 Guidance 2015 % Change
       
Adjusted Operating Revenues  \\$906 to \\$957 \\$829  9% to 15%
Adjusted EBITDA  \\$200 to \\$218 \\$194  3% to 12%
Adjusted Net Income  \\$144 to \\$155 \\$145  -1% to 7%
Adjusted Diluted EPS  \\$2.47 to \\$2.66 \\$2.57  -4% to 4%
 

The updated 2016 guidance above includes \\$61 million or \\$1.04 per diluted share for reduction in income taxes payable that will be excluded from Adjusted Net Income and Adjusted Diluted Earnings per Share and presented separately beginning in the third fiscal quarter as described above under Future Change in non-GAAP Measures of Adjusted Net Income and Adjusted Diluted Earnings per Share.

Included in the table below is pro forma 2016 guidance and 2015 results that reflect the revised presentation.

\\$ in millions except per share amounts 2016 Guidance
pro forma		 2015 Actual
pro forma		 % Change
       
Adjusted Operating Revenues  \\$906 to \\$957 \\$829  9% to 15%
Adjusted EBITDA  \\$200 to \\$218 \\$194  3% to 12%
Adjusted Net Income  \\$83 to \\$94 \\$90  -8% to 4%
Adjusted Diluted EPS  \\$1.43 to \\$1.62 \\$1.59  -10% to 2%
         
Reduction in income taxes payable  \\$61  \\$55   10%
Reduction in income taxes payable per share (diluted)  \\$1.04  \\$0.98   6%
              

The guidance above does not account for the impact of any future acquisitions, dispositions, partnerships or similar transactions, any changes to the Company’s existing capital structure or business model or any adverse outcome to any litigation or government investigation, and any such developments could have an impact on the Company’s guidance. Also see “Forward Looking Statements” below.

Conference Call/Webcast

On Wednesday, July 20, 2016 at 5:30 a.m. PDT / 8:30 a.m. EDT, the Company will host a conference call and webcast presentation to discuss second quarter financial results and share additional guidance for the remainder of 2016.  A copy of the webcast presentation slides will be posted to the presentations tab of the Company’s investor relations website at approximately 3 p.m. PDT on July 19, 2016.  Hosting the call will be Talbott Roche, Chief Executive Officer and president; Jerry Ulrich, Chief Financial & Administrative Officer; and Bill Tauscher, Chairman. Participants may access the live webcast by visiting the Company’s investor relations website at ir.blackhawknetwork.com.  An audio replay of the webcast will be available on the Company’s investor relations website until Friday, August 12, 2016.

About Blackhawk Network

Blackhawk Network Holdings, Inc. is a leading prepaid and payments global company that supports the program management and distribution of gift cards, prepaid telecom products and financial service products in a number of different retail, digital and incentive channels. Blackhawk’s digital platform supports prepaid across a network of digital distribution partners including retailers, financial service providers, and mobile wallets. For more information, please visit www.blackhawknetwork.com or product websites Cardpool, Gift Card Lab, Gift Card Mall, GiftCards.com and OmniCard.

Non-GAAP Financial Measures

Blackhawk regards the non-GAAP financial measures provided in this press release as useful measures of the operational and financial performance of its business.  Adjusted EBITDA, Adjusted net income and Adjusted diluted earnings per share measures are prepared and presented to eliminate the effect of items from EBITDA, Net income and Diluted earnings per share that the Company does not consider indicative of its core operating performance within the period presented. Adjusted net income and Adjusted diluted earnings per share are also adjusted to include certain significant tax benefits that the Company considers important for understanding its overall operating results.  Beginning the third quarter of 2016, the Company will no longer include the reduction in income taxes payable in its Adjusted Net Income or Adjusted Diluted Earnings per Share calculations.  Adjusted operating revenues are prepared and presented to offset the distribution commissions paid and other compensation to distribution partners and business clients. Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of Adjusted operating revenues. Adjusted operating revenues, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted net income and Adjusted diluted earnings per share may not be comparable to similarly titled measures of other organizations because other organizations may not calculate these measures in the same manner as Blackhawk. Investors are encouraged to evaluate our adjustments and the reasons we consider them appropriate.

The Company believes Adjusted operating revenues, EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted net income and Adjusted diluted earnings per share are useful to evaluate the Company's operating performance for the following reasons:

  • adjusting operating revenues for distribution commissions paid and other compensation to retail distribution partners and business clients is useful to understanding the Company's operating margin;
  • adjusting operating revenues for marketing revenue, which has offsetting marketing expense, is useful for understanding the Company's operating margin;
  • EBITDA and Adjusted EBITDA are widely used by investors and securities analysts to measure a company’s operating performance without regard to items that can vary substantially from company to company and from period to period depending upon their financing, accounting and tax methods, the book value of their assets, their capital structures and the method by which their assets were acquired;
  • Adjusted EBITDA margin provides a measure of operating efficiency based on Adjusted operating revenues and without regard to items that can vary substantially from company to company and from period to period depending upon their financing, accounting and tax methods, the book value of their assets, their capital structures and the method by which their assets were acquired;
  • in a business combination, a company records an adjustment to reduce the carrying values of deferred revenue and deferred expenses to their fair values and reduces the company’s revenues and expenses from what it would have recorded otherwise, and as such the Company does not believe is indicative of its core operating performance;
  • non-cash equity grants made to employees and distribution partners at a certain price and point in time do not necessarily reflect how the Company's business is performing at any particular time and the related expenses are not key measures of the Company's core operating performance;
  • the net gain on the transaction to transition our program-managed GPR business to another program manager is not reflective of our core operating performance;
  • intangible asset amortization expenses can vary substantially from company to company and from period to period depending upon the applicable financing and accounting methods, the fair value and average expected life of the acquired intangible assets, the capital structure and the method by which the intangible assets were acquired and, as such, the Company does not believe that these adjustments are reflective of its core operating performance; 
  • non-cash fair value adjustments to contingent business acquisition liability do not directly reflect how the Company is performing at any particular time and the related expense adjustment amounts are not key measures of the Company's core operating performance; 
  • reduction in income taxes payable from the step up in tax basis of our assets resulting from the Section 336(e) election due to our Spin-Off and the Safeway Merger and reduction in income taxes payable from amortization of goodwill and other intangibles or utilization of net operating loss carryforwards from business acquisitions represent significant tax savings that are useful for understanding the Company's overall operating results;
  • reduction in income taxes payable resulting from the tax deductibility of stock-based compensation is useful for understanding the Company's overall operating results. The Company generally realizes these tax deductions when restricted stock vest, an option is exercised, and, in the case of warrants, after the warrant is exercised but amortized over remaining service period, and such timing differs from the GAAP treatment of expense recognition; and
  • Adjusted free cash flow - the Company receives funds from consumers or business clients for prepaid products that the Company issues or holds on their behalf prior to the issuance of prepaid products. The Company views this cash flow as temporary and not indicative of the cash flows generated by its operating activity, and therefore excludes it from calculations of Adjusted free cash flow. Adjusted free cash flow provides information regarding the cash that the Company generates without the fluctuations resulting from the timing of cash inflows and outflows from these settlement activities, which is useful to understanding the Company's business and its ability to fund capital expenditures and repay amounts borrowed under its term loan. The Company also may use Adjusted free cash flow for, among other things, making investment decisions and managing its capital structure.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are indicated by words or phrases such as “guidance,” “believes,” “expects,” “anticipates,” “estimates,” “plans,” “continuing,” “ongoing,” and similar words or phrases and the negative of such words and phrases. Forward-looking statements are based on our current plans and expectations and involve risks and uncertainties which are, in many instances, beyond our control, and which could cause actual results to differ materially from those included in or contemplated or implied by the forward-looking statements. Such risks and uncertainties include the following:  our ability to generate adequate taxable income to enable us to fully utilize the tax benefits referred to in this release, changes in applicable tax law that preclude us from fully utilizing the tax benefits referred to in this release, our ability to grow adjusted operating revenues and adjusted net income as anticipated, our ability to grow at historic rates or at all, the consequences should we lose one or more of our top distribution partners or fail to attract new distribution partners to our network or if the financial performance of our distribution partners’ businesses decline, our reliance on our content providers, the demand for their products and our exclusivity arrangements with them, our reliance on relationships with card issuing banks, the consequences to our future growth if our distribution partners fail to actively and effectively promote our products and services, the ability of our distribution partners to implement EMV compliance within their expected timeline and lift the measures they may have taken prior to such compliance to limit or control their exposure to liability for fraud losses; changes in consumer behavior away from our distribution partners and our products resulting from limits or controls implemented by our distribution partners during our distribution partners’ transition to EMV compliance; the requirement that we comply with applicable laws and regulations, including increasingly stringent money-laundering rules and regulations, and other risks and uncertainties described in our reports and filings with the Securities and Exchange Commission (the “SEC”), including the risks and uncertainties set forth in Item 1A under the heading Risk Factors in our Annual Report on Form 10-K for the year ended January 2, 2016, our Quarterly Report on Form 10-Q for the fiscal quarter ended on June 18, 2016 which is expected to be filed prior to or on July 28, 2016, and other subsequent periodic reports we file with the Securities and Exchange Commission.  We undertake no obligation to update forward-looking statements to reflect developments or information obtained after the date hereof and disclaim any obligation to do so other than as may be required by law.

BLACKHAWK NETWORK HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(In thousands, except per share amounts)
(Unaudited)
 12 weeks ended 24 weeks ended
 June 18,
 2016		 June 20,
 2015		 June 18,
 2016		 June 20,
 2015
OPERATING REVENUES:       
Commissions and fees\\$262,931  \\$257,445  \\$502,555  \\$477,847 
Program and other fees67,419  52,153  142,861  110,526 
Marketing20,696  28,070  34,155  42,801 
Product sales40,160  34,580  78,097  60,805 
Total operating revenues391,206  372,248  757,668  691,979 
OPERATING EXPENSES:       
Partner distribution expense191,231  176,987  363,386  332,341 
Processing and services76,134  65,818  149,241  130,026 
Sales and marketing60,511  63,106  113,849  106,699 
Costs of products sold38,309  32,113  74,041  57,016 
General and administrative23,298  21,302  47,629  40,050 
Transition and acquisition641  641  1,586  816 
Amortization of acquisition intangibles15,259  5,503  25,157  11,477 
Change in fair value of contingent consideration800  (3,428) 800  (7,567)
Total operating expenses406,183  362,042  775,689  670,858 
OPERATING INCOME (LOSS)(14,977) 10,206  (18,021) 21,121 
OTHER INCOME (EXPENSE):       
Interest income and other income (expense), net486  284  898  (517)
Interest expense(4,118) (2,578) (8,184) (5,335)
INCOME (LOSS) BEFORE INCOME TAX EXPENSE(18,609) 7,912  (25,307) 15,269 
INCOME TAX EXPENSE (BENEFIT)(7,290) 5,105  (10,527) 7,725 
NET INCOME (LOSS) BEFORE ALLOCATION TO NON-CONTROLLING INTERESTS(11,319) 2,807  (14,780) 7,544 
Loss (income) attributable to non-controlling interests, net of tax(18) 97  (110) 66 
NET INCOME (LOSS) ATTRIBUTABLE TO BLACKHAWK NETWORK HOLDINGS, INC.\\$(11,337) \\$2,904  \\$(14,890) \\$7,610 
EARNINGS (LOSS) PER SHARE:       
Basic\\$(0.20) \\$0.05  \\$(0.27) \\$0.14 
Diluted\\$(0.20) \\$0.05  \\$(0.27) \\$0.14 
Weighted average shares outstanding—basic56,134  54,042  55,944  53,682 
Weighted average shares outstanding—diluted56,134  55,896  55,944  55,689 
            
BLACKHAWK NETWORK HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 June 18,
 2016		 January 2,
 2016		 June 20,
 2015
ASSETS     
Current assets:     
Cash and cash equivalents\\$263,988  \\$914,576  \\$276,733 
Restricted cash2,500  3,189  3,189 
Settlement receivables, net340,925  626,077  311,250 
Accounts receivable, net226,929  241,729  178,305 
Other current assets103,061  103,319  93,553 
Total current assets937,403  1,888,890  863,030 
Property, equipment and technology, net165,246  159,357  134,792 
Intangible assets, net302,435  240,898  159,443 
Goodwill511,808  402,489  330,493 
Deferred income taxes349,286  339,558  363,662 
Other assets67,597  81,764  80,557 
TOTAL ASSETS\\$2,333,775  \\$3,112,956  \\$1,931,977 
LIABILITIES AND STOCKHOLDERS’ EQUITY     
Current liabilities:     
Settlement payables\\$607,463  \\$1,605,021  \\$556,502 
Consumer and customer deposits132,662  84,761  113,219 
Accounts payable and accrued operating expenses97,717  119,087  112,830 
Deferred revenue111,941  113,458  36,616 
Note payable, current portion156,091  37,296  37,393 
Notes payable to Safeway3,753  4,129  14,932 
Bank line of credit100,000  —  — 
Other current liabilities48,259  57,342  33,236 
Total current liabilities1,257,886  2,021,094  904,728 
Deferred income taxes20,168  18,652  7,630 
Note payable268,571  324,412  325,287 
Other liabilities24,196  14,700  4,047 
Total liabilities1,570,821  2,378,858  1,241,692 
Stockholders’ equity:     
Preferred stock—  —  — 
Common stock56  56  55 
Additional paid-in capital581,712  561,939  538,357 
Accumulated other comprehensive loss(32,065) (40,195) (24,795)
Retained earnings208,895  207,973  169,985 
Total Blackhawk Network Holdings, Inc. equity758,598  729,773  683,602 
Non-controlling interests4,356  4,325  6,683 
Total stockholders’ equity762,954  734,098  690,285 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY\\$2,333,775  \\$3,112,956  \\$1,931,977 
            
BLACKHAWK NETWORK HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 24 weeks ended 52 weeks ended 53 weeks ended
 June 18,
 2016		 June 20,
 2015		 June 18,
 2016		 June 20,
 2015
OPERATING ACTIVITIES:       
Net income (loss) before allocation to non-controlling interests\\$(14,780) \\$7,544  \\$23,485  \\$50,790 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:       
Depreciation and amortization of property, equipment and technology21,684  17,944  44,723  34,921 
Amortization of intangibles27,459  13,528  46,297  27,782 
Amortization of deferred program and contract costs12,544  13,150  28,385  26,050 
Employee stock-based compensation expense16,572  12,739  33,963  22,014 
Distribution partner mark-to-market expense—  —  —  1,400 
Change in fair value of contingent consideration800  (7,567) 800  (11,289)
Deferred income taxes—  13,371  16,439  1,546 
Other963  3,194  5,517  5,856 
Changes in operating assets and liabilities:       
Settlement receivables293,441  209,373  (27,610) (48,529)
Settlement payables(1,005,723) (822,327) 48,266  34,240 
Accounts receivable, current and long-term16,964  5,886  (46,093) (42,173)
Other current assets16,914  (9,895) 9,599  (16,399)
Other assets(2,544) (4,559) (18,419) (20,679)
Consumer and customer deposits31,974  (20,554) (1,874) 15,951 
Accounts payable and accrued operating expenses(33,574) (2,218) (34,344) 16,532 
Deferred revenue493  (11,498) 26,354  19,594 
Other current and long-term liabilities(21,742) (1,173) (3,692) 2,207 
Income taxes, net(4,722) (12,181) 4,850  (15,670)
Net cash provided by (used in) operating activities(643,277) (595,243) 156,646  104,144 
INVESTING ACTIVITIES:       
Expenditures for property, equipment and technology(20,281) (25,622) (47,397) (47,090)
Business acquisitions, net of cash acquired(144,477) —  (259,958) (240,156)
Investments in unconsolidated entities—  —  (5,877) — 
Change in restricted cash689  1,811  689  (3,189)
Other(2,500) —  (2,598) (499)
Net cash used in investing activities(166,569) (23,811) (315,141) (290,934)
        
 24 weeks ended 52 weeks ended 53 weeks ended
 June 18,
 2016		 June 20,
 2015		 June 18,
 2016		 June 20,
 2015
FINANCING ACTIVITIES:       
Payments for acquisition liability—  (1,811) —  (1,811)
Proceeds from issuance of note payable100,000  —  100,000  200,000 
Repayment of note payable(37,500) (11,250) (37,500) (11,250)
Payments of financing costs—  —  (2,063) (1,331)
Borrowings under revolving bank line of credit1,502,675  903,500  3,072,704  1,118,500 
Repayments on revolving bank line of credit(1,402,675) (903,500) (2,972,704) (1,118,500)
Proceeds from notes payable to Safeway—  —  —  27,678 
Repayment on notes payable to Safeway(376) (4,517) (10,144) (4,517)
Repayment of debt assumed in business acquisitions(8,964) —  (8,964) (41,984)
Proceeds from issuance of common stock from exercise of employee stock options and employee stock purchase plans3,452  7,579  9,690  13,039 
Other stock-based compensation related(2,002) (790) (2,941) (959)
Other—  (199) (1,295) (326)
Net cash provided by (used in) financing activities154,610  (10,988) 146,783  178,539 
Effect of exchange rate changes on cash and cash equivalents4,648  (4,840) (1,033) (14,743)
Increase (decrease) in cash and cash equivalents(650,588) (634,882) (12,745) (22,994)
Cash and cash equivalents—beginning of period914,576  911,615  276,733  299,727 
Cash and cash equivalents—end of period\\$263,988  \\$276,733  \\$263,988  \\$276,733 
        
NONCASH FINANCING AND INVESTING ACTIVITIES       
Net deferred tax assets recognized for tax basis step-up with offset to Additional paid-in capital\\$—  \\$366,306  \\$—  \\$366,306 
Note payable to Safeway contributed to Additional paid-in capital\\$—  \\$8,229  \\$—  \\$8,229 
Financing of business acquisition with contingent consideration\\$20,100  \\$—  \\$20,100  \\$13,100 
Intangible assets recognized for warrants issued\\$—  \\$3,147  \\$—  \\$3,147 
                

BLACKHAWK NETWORK HOLDINGS, INC.
SUPPLEMENTAL INFORMATION
(In thousands except percentages and per share amounts)
(Unaudited)

TABLE 1: OTHER OPERATIONAL DATA
 12 weeks ended 24 weeks ended
 June 18,
2016		 June 20,
2015		 June 18,
2016		 June 20,
2015
Transaction dollar volume\\$3,385,630  \\$3,381,991  \\$6,558,531  \\$6,492,524 
Prepaid and processing revenues\\$330,350  \\$309,598  \\$645,416  \\$588,373 
Prepaid and processing revenues as a % of transaction dollar volume9.8% 9.2% 9.8% 9.1%
Partner distribution expense as a % of prepaid and processing revenues57.9% 57.2% 56.3% 56.5%
            
TABLE 2: RECONCILIATION OF NON-GAAP MEASURES
 12 weeks ended 24 weeks ended
 June 18, 2016 June 20, 2015 June 18, 2016 June 20, 2015
Prepaid and processing revenues:       
Commissions and fees\\$262,931  \\$257,445  \\$502,555  \\$477,847 
Program and other fees67,419  52,153  142,861  110,526 
Total prepaid and processing revenues\\$330,350  \\$309,598  \\$645,416  \\$588,373 
Adjusted operating revenues:       
Total operating revenues\\$391,206  \\$372,248  \\$757,668  \\$691,979 
Revenue adjustment from purchase accounting4,439  —  8,209  — 
Marketing revenues(20,696) (28,070) (34,155) (42,801)
Partner distribution expense(191,231) (176,987) (363,386) (332,341)
Adjusted operating revenues\\$183,718  \\$167,191  \\$368,336  \\$316,837 
Adjusted EBITDA:       
Net income (loss) before allocation to non-controlling interests\\$(11,319) \\$2,807  \\$(14,780) \\$7,544 
Interest and other (income) expense, net(486) (284) (898) 517 
Interest expense4,118  2,578  8,184  5,335 
Income tax expense (benefit)(7,290) 5,105  (10,527) 7,725 
Depreciation and amortization28,180  16,078  49,143  31,472 
EBITDA13,203  26,284  31,122  52,593 
Adjustments to EBITDA:       
Employee stock-based compensation8,572  7,750  16,572  12,739 
Acquisition-related employee compensation expense200  —  200  — 
Revenue adjustment from purchase accounting, net4,364  —  7,449  — 
Gain on sale(754) —  (754) — 
Change in fair value of contingent consideration800  (3,428) 800  (7,567)
Adjusted EBITDA\\$26,385  \\$30,606  \\$55,389  \\$57,765 
Adjusted EBITDA margin:       
Total operating revenues\\$391,206  \\$372,248  \\$757,668  \\$691,979 
Operating income (loss)\\$(14,977) \\$10,206  \\$(18,021) \\$21,121 
Operating margin(3.8)% 2.7% (2.4)% 3.1%
Adjusted operating revenues\\$183,718  \\$167,191  \\$368,336  \\$316,837 
Adjusted EBITDA\\$26,385  \\$30,606  \\$55,389  \\$57,765 
Adjusted EBITDA margin14.4% 18.3% 15.0% 18.2%
Adjusted net income:       
Income (loss) before income tax expense\\$(18,609) \\$7,912  \\$(25,307) \\$15,269 
Employee stock-based compensation8,572  7,750  16,572  12,739 
Acquisition-related employee compensation expense200  —  200  — 
Revenue adjustment from purchase accounting, net4,364  —  7,449  — 
Gain on sale(754) —  (754) — 
Change in fair value of contingent consideration800  (3,428) 800  (7,567)
Amortization of intangibles16,411  6,529  27,459  13,528 
Adjusted income before income tax expense10,984  18,763  26,419  33,969 
Income tax expense (benefit)(7,290) 5,105  (10,527) 7,725 
Tax expense on adjustments11,025  1,961  19,769  4,882 
Adjusted income tax expense before reduction in income taxes payable3,735  7,066  9,242  12,607 
Reduction in income taxes payable resulting from amortization of spin-off tax basis step-up(6,593) (6,618) (13,187) (13,236)
Reduction in income taxes payable from amortization of acquisition intangibles, utilization of acquired NOLs and deductible stock-based compensation(7,164) (5,928) (17,090) (14,011)
Adjusted income tax benefit(10,022) (5,480) (21,035) (14,640)
Adjusted net income before allocation to non-controlling interests21,006  24,243  47,454  48,609 
Net loss (income) attributable to non-controlling interests, net of tax(18) 97  (110) 66 
Adjusted net income attributable to Blackhawk Network Holdings, Inc.\\$20,988  \\$24,340  \\$47,344  \\$48,675 
Adjusted diluted earnings per share:       
Net income (loss) attributable to Blackhawk Network Holdings, Inc.\\$(11,337) \\$2,904  \\$(14,890) \\$7,610 
Distributed and undistributed earnings allocated to participating securities—  (6) (15) (56)
Net income (loss) available for common shareholders\\$(11,337) \\$2,898  \\$(14,905) \\$7,554 
Diluted weighted average shares outstanding56,134  55,896  55,944  55,689 
Diluted earnings (loss) per share\\$(0.20) \\$0.05  \\$(0.27) \\$0.14 
Adjusted net income attributable to Blackhawk Network Holdings, Inc.\\$20,988  \\$24,340  \\$47,344  \\$48,675 
Adjusted distributed and undistributed earnings allocated to participating securities(19) (51) (77) (166)
Adjusted net income available for common shareholders\\$20,969  \\$24,289  \\$47,267  \\$48,509 
Diluted weighted-average shares outstanding56,134  55,896  55,944  55,689 
Increase in common share equivalents1,229  —  1,503  — 
Adjusted diluted weighted-average shares outstanding57,363  55,896  57,447  55,689 
Adjusted diluted earnings per share\\$0.37  \\$0.43  \\$0.82  \\$0.87 
                

TABLE 3:  RECONCILIATION OF ADJUSTED NET INCOME AND ADJUSTED DILUTED EPS, REVISED

Beginning the third quarter of 2016, in response to the SEC’s Compliance and Disclosure Interpretations published on May 17, 2016 pertaining to non-GAAP Financial Measures, the Company will revise its presentation of two non-GAAP financial measures, Adjusted Net Income and Adjusted Diluted Earnings per Share. The reduction in income taxes payable previously included in the determination of Adjusted Net Income will no longer be included, but will be provided separately including the per-share amount of the reductions.  The revised presentation of Adjusted Net Income and Adjusted Diluted Earnings per Share is shown in the table below.

 12 weeks ended 24 weeks ended
 June 18, 2016 June 20, 2015 June 18, 2016 June 20, 2015
Adjusted net income, revised:       
Income (loss) before income tax expense\\$(18,609) \\$7,912  \\$(25,307) \\$15,269 
Employee stock-based compensation8,572  7,750  16,572  12,739 
Acquisition-related employee compensation expense200  —  200  — 
Revenue adjustment from purchase accounting, net4,364  —  7,449  — 
Gain on sale(754) —  (754) — 
Change in fair value of contingent consideration800  (3,428) 800  (7,567)
Amortization of intangibles16,411  6,529  27,459  13,528 
Adjusted income before income tax expense\\$10,984  \\$18,763  \\$26,419  \\$33,969 
Income tax expense (benefit)(7,290) 5,105  (10,527) 7,725 
Tax expense on adjustments11,025  1,961  19,769  4,882 
Adjusted income tax expense3,735  7,066  9,242  12,607 
Adjusted net income before allocation to non-controlling interests7,249  11,697  17,177  21,362 
Net loss (income) attributable to non-controlling interests, net of tax(18) 97  (110) 66 
Adjusted net income attributable to Blackhawk Network Holdings, Inc., revised\\$7,231  \\$11,794  \\$17,067  \\$21,428 
Adjusted diluted earnings per share, revised:       
Net income (loss) attributable to Blackhawk Network Holdings, Inc.\\$(11,337) \\$2,904  \\$(14,890) \\$7,610 
Distributed and undistributed earnings allocated to participating securities—  (6) (15) (56)
Net income (loss) available for common shareholders\\$(11,337) \\$2,898  \\$(14,905) \\$7,554 
Diluted weighted average shares outstanding56,134  55,896  55,944  55,689 
Diluted earnings (loss) per share\\$(0.20) \\$0.05  \\$(0.27) \\$0.14 
Adjusted net income attributable to Blackhawk Network Holdings, Inc.\\$7,231  \\$11,794  \\$17,067  \\$21,428 
Adjusted distributed and undistributed earnings allocated to participating securities(6) (25) (38) (93)
Adjusted net income available for common shareholders\\$7,225  \\$11,769  \\$17,029  \\$21,335 
Diluted weighted-average shares outstanding56,134  55,896  55,944  55,689 
Increase in common share equivalents1,229  —  1,503  — 
Adjusted diluted weighted-average shares outstanding57,363  55,896  57,447  55,689 
Adjusted diluted earnings per share, revised\\$0.13  \\$0.21  \\$0.30  \\$0.38 
Reduction in income taxes payable:       
Reduction in income taxes payable resulting from amortization of spin-off tax basis step-up\\$6,593  \\$6,618  \\$13,187  \\$13,236 
Reduction in income taxes payable from amortization of acquisition intangibles, utilization of acquired NOLs and deductible stock-based compensation7,164  5,928  17,090  14,011 
Reduction in income taxes payable\\$13,757  \\$12,546  \\$30,277  \\$27,247 
Adjusted diluted weighted average shares outstanding57,363  55,896  57,447  55,689 
Reduction in income taxes payable per share\\$0.24  \\$0.22  \\$0.53  \\$0.49 
                
TABLE 4:  RECONCILIATION OF GAAP CASH FLOW TO ADJUSTED FREE CASH FLOW
 52 weeks ended 53 weeks ended
 June 18, 2016 June 20, 2015
Net cash flow provided by (used in) operating activities\\$156,646  \\$104,144 
Changes in settlement payables and consumer and customer deposits, net of settlement receivables(18,782) (1,662)
Benefit from settlement timing20,669  63,154 
Adjust for: Safeway cash tax payment reimbursed (refunded)(10,144) 23,161 
Adjusted net cash flow provided by operating activities148,389  188,797 
Expenditures for property, equipment and technology(47,397) (47,090)
Adjusted free cash flow\\$100,992  \\$141,707 
Reconciliation of Adjusted EBITDA to Adjusted free cash flow   
Adjusted EBITDA\\$191,573  \\$168,874 
Less: Expenditures for property, equipment and technology(47,397) (47,090)
Less: Interest paid(12,965) (8,981)
Less: Cash taxes (paid)/refunded3,224  (25,242)
Less: Revenue adjustment from purchase price accounting, net(14,522) — 
Change in working capital and other(39,590) (9,008)
Cash benefit from settlement timing20,669  63,154 
Adjusted free cash flow\\$100,992  \\$141,707