Notes to Consolidated Financial Statements
(Thousands of dollars, except share and per share data)
Unless the context otherwise indicates, references in these Notes to the accompanying consolidated financial statements to “we,” “us,” “our” and “the Company” refer to Barnes & Noble Education, Inc., a Delaware corporation. References to “Barnes & Noble” refer to Barnes & Noble, Inc., a Delaware corporation, and its consolidated subsidiaries (other than Barnes & Noble Education, Inc. and its consolidated subsidiaries) unless the context otherwise requires. References to “Barnes & Noble College” refer to our college bookstore business operated through our subsidiary Barnes & Noble College Booksellers, LLC.
Note 1.
Organization
Description of Business
Barnes & Noble Education, Inc., one of the largest contract operators of bookstores on college and university campuses across the United States and a leading provider of digital education services, enhances the academic and social purpose of educational institutions. As a strategic partner, we are committed to offering a complete support system and an unmatched retail and digital learning experience to foster student success in higher education. Through our wholly-owned subsidiary, Barnes & Noble College, we operate
751
campus bookstores and the school-branded e-commerce sites for each store, serving more than
5 million
college students and their faculty nationwide. On August 2, 2015, we completed the legal separation from Barnes & Noble, Inc., at which time we began to operate as an independent publicly-traded company.
Overall educational spending in the United States continues to increase dramatically, and as tuition and other costs rise, colleges and universities face pressure to attract and retain students and provide them with innovative, affordable educational content and tools that support their educational development. While traditional print textbooks remain the first choice of students, demand for alternative forms of educational materials is growing.
We offer a complete set of products and services to help students, faculty and administrators achieve their shared educational and social goals on college and university campuses across the United States. As one of the largest contract operators of bookstores and provider of digital education services, we operate as a focal point for college life and learning, advancing the educational mission of our institution partners, enlivening campus culture and delivering an important revenue stream to our partner schools.
For over
5 million
students and their faculty, our campus stores are a social and academic hub through which students can access affordable course materials and affinity products, including new and used print and digital textbooks, which are available for sale or rent; emblematic apparel and gifts; trade books; computer products; school and dorm supplies; café; convenience food and beverages; and graduation products. Through multi-year management service agreements with our schools, we typically have the exclusive right to operate the official school bookstore on college campuses. In turn, we pay the school a percentage of store sales and, in some cases, a minimum fixed guarantee. We create seamless retail experiences for our customers, both in our dynamic physical stores or our official school-branded e-commerce sites for each school.
As of
April 30, 2016
, we operated
751
stores nationwide, which reached
26%
of the total number of students enrolled at colleges and universities in the United States. Our stores are operated under
472
contracts, some of which cover multiple store locations, and
165
of our college and university affiliated bookstores are co-branded with the Barnes & Noble name.
Fiscal 2016 was an excellent year for new store signings, and we have a strong pipeline of new business opportunities. During the 2016 fiscal year, we opened
39
stores with estimated first year annual sales of
$64,000
.
We are well positioned to benefit from the continuing trend towards outsourcing across the campus bookstore market given our brand, reputation with institutions, students and faculty for service and our full suite of products and services including: bookstore management, textbook rental and digital delivery.
Growth Drivers
The primary factors that we expect will enable us to grow our business are as follows:
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•
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Increase Market Share with New Accounts
.
|
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|
•
|
Adapting our Merchandising Strategy and Product and Service Offerings.
|
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|
•
|
Scalable and Leading Digital Product and Solution Set
.
|
|
|
•
|
Expand Strategic Opportunities through Acquisitions and Partnerships
.
|
For additional information related to ou
r Strategies, see Part I - Item 1. Business - Overview - Offering - Comprehensive Learning Solutions - Growth Drivers.
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
Separation from Barnes & Noble, Inc.
On February 26, 2015, Barnes & Noble announced plans to Spin-Off its
100%
equity interest in our Company. At the time of the Spin-Off on August 2, 2015, Barnes & Noble distributed all of its equity interest in us, consisting of all of the outstanding shares of our Common Stock, to Barnes & Noble’s stockholders on a pro rata basis (the “Distribution”). Following the Spin-Off, Barnes & Noble did not own any equity interest in us. On August 2, 2015, we completed the legal separation from Barnes & Noble, at which time we began to operate as an independent publicly-traded company. For details related to the Distribution of our Common Stock, see
Note 6. Equity and Earnings Per Share
.
In connection with the separation from Barnes & Noble, we entered into several agreements that govern the relationship between the parties after the separation and allocate between the parties various assets, liabilities, rights and obligations following the separation and also describe Barnes & Noble’s future commitments to provide us with certain transition services following the Spin-Off. For additional information related to these agreements, see
Note 10. Barnes & Noble, Inc. Transactions
.
The results of operations for the 13 weeks ended August 1, 2015, Fiscal 2015, Fiscal 2014 (periods presented prior to the Spin-Off), reflected in our consolidated financial statements are presented on a stand-alone basis since we were still part of Barnes & Noble, Inc. until the consummation of the Spin-Off on August 2, 2015 and the results of operations for the 39 weeks ended
April 30, 2016
reflected in our consolidated financial statements are presented on a consolidated basis as we became a separate consolidated entity (as discussed in
Note 2. Summary of Significant Accounting Policies
).
Note 2.
Summary of Significant Accounting Policies
Basis of Presentation
Our consolidated financial statements reflect our consolidated financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”). In the opinion of the Company’s management, the accompanying consolidated financial statements of the Company contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly its consolidated financial position and the results of its operations and cash flows for the periods reported.
Our fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. Our business is highly seasonal, with the major portion of sales and operating profit realized during the second and third fiscal quarters, when college students generally purchase and rent textbooks for the upcoming semesters. The fiscal year periods for each of the last three fiscal years consisted of the 52 weeks ended
April 30, 2016
(Fiscal 2016), 52 weeks ended
May 2, 2015
(Fiscal 2015), and 53 weeks ended
May 3, 2014
(Fiscal 2014).
Stand-alone basis financial statements
The results of operations for the 13 weeks ended August 1, 2015, Fiscal 2015, Fiscal 2014 (periods presented prior to the Spin-Off), (collectively referred to as the "stand-alone periods") reflected in our consolidated financial statements are presented on a stand-alone basis since we were still part of Barnes & Noble, Inc. Our consolidated financial statements were derived from the consolidated financial statements and accounting records of Barnes & Noble. Our consolidated financial statements include certain assets and liabilities that have historically been held at the Barnes & Noble corporate level but are specifically identifiable or otherwise attributable to us. For additional information, see
Note 10. Barnes & Noble, Inc. Transactions
.
Consolidated basis financial statements
The Spin-Off from Barnes & Noble, Inc. occurred on August 2, 2015 and therefore, the results of operations are presented on a consolidated basis for the 39 weeks ended
April 30, 2016
(i.e. second, third and fourth quarter of fiscal 2016) which includes direct costs incurred with Barnes & Noble under various agreements. Certain corporate and shared service functions historically provided by Barnes & Noble (as described above) will continue to be provided by Barnes & Noble under the Transition Services Agreement. For additional information, see
Note 10. Barnes & Noble, Inc. Transactions
.
Use of Estimates
In preparing financial statements in conformity with GAAP, we are required to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
Cash and Cash Equivalents
We consider all short-term, highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents.
Restricted Cash
As of April 30, 2016, restricted cash of
$301
and
$1,996
is included in prepaid and other current assets and other noncurrent assets, respectively, in the consolidated balance sheet. We generally do not control these accounts and these funds are amounts held for future scheduled distributions related to acquisitions. Such funds are invested principally in money market funds.
Accounts Receivable
Receivables represent customer, private and public institutional and government billings (colleges, universities and other financial aid providers), credit/debit card, advertising and other receivables due within one year as follows:
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|
|
|
|
|
|
As of
|
|
|
April 30, 2016
|
|
May 2, 2015
|
Trade accounts
|
|
$
|
35,578
|
|
|
$
|
26,423
|
|
Due from affiliate
(see Note 10)
|
|
—
|
|
|
38,241
|
|
Credit/debit card receivables
|
|
3,253
|
|
|
2,818
|
|
Other receivables
|
|
12,093
|
|
|
9,069
|
|
Total receivables, net
|
|
$
|
50,924
|
|
|
$
|
76,551
|
|
Accounts receivable are presented on our consolidated balance sheets net of allowances. An allowance for doubtful accounts is determined through an analysis of the aging of accounts receivable and assessments of collectability based on historical trends, the financial condition of our customers and an evaluation of economic conditions. We write-off uncollectible trade receivables once collection efforts have been exhausted and record bad debt expenses related to textbook rentals that are not returned and we are unable to successfully charge the customer. Allowance for doubtful accounts were
$2,320
and
$2,313
as of Fiscal 2016 and Fiscal 2015, respectively.
Merchandise Inventories
Merchandise inventories, which consist of finished goods, are stated at the lower of cost or market. Cost is determined primarily by the retail inventory method. Our textbook and trade book inventories are valued using the last-in first out, or “LIFO”, method and the related reserve was not material to the recorded amount of our inventories. There were no LIFO adjustments in Fiscal 2016 and Fiscal 2015 compared to a favorable LIFO adjustment of
$7,692
through cost of goods sold in Fiscal 2014.
Market value of our inventory is determined based on its estimated net realizable value, which is generally the selling price. Reserves for non-returnable inventory are based on our history of liquidating non-returnable inventory.
We also estimate and accrue shortage for the period between the last physical count of inventory and the balance sheet date. Shortage rates are estimated and accrued based on historical rates and can be affected by changes in merchandise mix and changes in actual shortage trends.
The products that we sell originate from a wide variety of domestic and international vendors. During Fiscal 2016, our four largest suppliers accounted for approximately
46%
of our merchandise purchased.
Textbook Rental Inventories
Physical textbooks out on rent are categorized as textbook rental inventories. At the time a rental transaction is consummated, the book is removed from merchandise inventories and moved to textbook rental inventories at cost. The cost of the book is amortized down to its estimated residual value over the rental period. The related amortization expense is included in cost of goods sold. At the end of the rental period, upon return, the book is removed from textbook rental inventories and recorded in merchandise inventories at its amortized cost.
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
Property and Equipment
Property and equipment are carried at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over estimated useful lives. Maintenance and repairs are expensed as incurred, however major maintenance and remodeling costs are capitalized if they extend the useful life of the asset. We had
$42,213
,
$40,257
, and
$37,720
of depreciation expense for
Fiscal 2016, Fiscal 2015 and Fiscal 2014
, respectively.
Components of property and equipment are as follows:
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As of
|
|
|
Useful Life
|
|
April 30, 2016
|
|
May 2, 2015
|
Property and equipment:
|
|
|
|
|
|
|
Leasehold improvements
|
|
(a)
|
|
$
|
142,595
|
|
|
$
|
138,307
|
|
Display fixtures and equipment
|
|
3-5
|
|
219,289
|
|
|
206,705
|
|
Capitalized software costs
|
|
(b)
|
|
88,937
|
|
|
83,958
|
|
Office furniture and other
|
|
5-7
|
|
46,856
|
|
|
44,740
|
|
Construction in Progress
|
|
|
|
17,302
|
|
|
10,758
|
|
Total property and equipment
|
|
|
|
514,979
|
|
|
484,468
|
|
Less accumulated depreciation and amortization
|
|
|
|
403,794
|
|
|
376,911
|
|
Total property and equipment, net
|
|
|
|
$
|
111,185
|
|
|
$
|
107,557
|
|
|
|
(a)
|
Leasehold improvements are capitalized and depreciated over the terms of the respective leases, ranging from one to 15 years.
|
|
|
(b)
|
System costs are capitalized and amortized over their estimated useful lives, from the date the systems become operational. Purchased software is generally amortized over 3 years.
|
Other Long-Lived Assets
Our other long-lived assets include property and equipment and amortizable intangibles. We had
$199,663
and
$198,190
of amortizable intangible assets, net of amortization, as of
April 30, 2016
and
May 2, 2015
, respectively. These amortizable intangible assets relate primarily to our customer relationships with our colleges and university clients, and technology acquired. For additional information related to amortizable intangibles, see
Note 9. Supplementary Information - Intangible Assets
.
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and consider market participants in accordance with Accounting Standards Codification ("ASC") 360-10,
Accounting for the Impairment or Disposal of Long-Lived Assets
. We evaluate long-lived assets for impairment at the school contract combined store level, which is the lowest level at which individual cash flows can be identified. When evaluating long-lived assets for potential impairment, we first compare the carrying amount of the assets to the school contract combined store level’s estimated future undiscounted cash flows. If the estimated future cash flows are less than the carrying amount of the assets, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the assets to the school contract combined store level’s fair value based on its estimated discounted future cash flows. If required, an impairment loss is recorded for that portion of the asset’s carrying value in excess of fair value. Impairment losses related to school contracts included in selling and administrative expenses totaled
$59
,
$7
, and
$11
during
Fiscal 2016, Fiscal 2015 and Fiscal 2014
, respectively.
In Fiscal 2016, we implemented a plan to restructure our digital operations. As a result of this restructuring, we recorded a non-cash impairment loss of
$11,987
. For additional information, see
Item 8. Financial Statements and Supplementary Data — Note 9. Supplementary Information.
Goodwill
The costs in excess of net assets of businesses acquired are carried as goodwill in the accompanying consolidated balance sheets. As of
April 30, 2016
and
May 2, 2015
, we had
$280,911
and
$274,070
of goodwill, respectively. For additional information, see
Note 9. Supplementary Information
.
ASC No. 350-30,
Goodwill and Other Intangible Assets
("ASC 350-30"), requires that goodwill be tested for impairment at least annually or earlier if there are impairment indicators. We perform a two-step process for impairment testing of goodwill as
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
required by ASC 350-30. The first step of this test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount. The second step (if necessary) measures the amount of the impairment.
We completed our annual goodwill impairment test as of the first day of the third quarter of fiscal 2016. In performing the valuation, we used cash flows that reflected management’s forecasts and discount rates that included risk adjustments consistent with the current market conditions. Based on the results of the step one testing, fair value of the one reporting unit exceeded its carrying value; therefore, the second step of the impairment test was not required to be performed and no goodwill impairment was recognized.
As of the date of our annual goodwill impairment test, the excess fair value over carrying value was approximately
9%
. Goodwill is subject to further risk of impairment if comparable store sales decline, store closings accelerate or digital projections fall short of expectations. Additionally, changes in the structure of our business as a result of future reorganizations, acquisitions or divestitures of assets or businesses could result in future impairments of goodwill. Refer to
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates
for a discussion of key assumptions used in our testing.
Revenue Recognition and Deferred Revenue
Revenue from sales of our products at physical locations is recognized at the time of sale. Revenue from sales of products ordered through our websites is recognized upon receipt of our products by our customers. Sales taxes collected from our customers are excluded from reported revenues. All of our sales are recognized as revenue on a “net” basis, including sales in connection with any periodic promotions offered to customers. We do not treat any promotional offers as expenses.
We rent both physical and digital textbooks. Revenue from the rental of physical textbooks is deferred and recognized over the rental period commencing at point of sale. Revenue from the rental of digital textbooks is recognized at time of sale. A software feature is embedded within the content of our digital textbooks, such that upon expiration of the rental term the customer is no longer able to access the content. While the digital rental allows the customer to access digital content for a fixed period of time, once the digital content is delivered to the customer our performance obligation is complete. We offer a buyout option to allow the purchase of a rented book at the end of the rental period. We record the buyout purchase when the customer exercises and pays the buyout option price. In these instances, we would accelerate any remaining deferred rental revenue at the point of sale.
Cost of Sales
Our cost of sales primarily include costs such as merchandise costs, textbook rental amortization and management service agreement costs, including rent expense, related to our college and university contracts and by other facility related expenses.
Selling and Administrative Expenses
Our selling and administrative expenses consist primarily of store payroll and store operating expenses. Selling and administrative expenses also include stock-based compensation and general office expenses, such as executive oversight, merchandising, field support, finance, human resources, benefits, training, legal, and information technology, as well as our investments in digital.
Stock-Based Compensation
Prior to the Spin-Off on August 2, 2015, certain of our employees were eligible to participate in Barnes & Noble, Inc. equity plans pursuant to which they were granted awards of Barnes & Noble, Inc. common stock. During the second quarter of Fiscal 2016, post Spin-Off, we began to grant awards in accordance with the Barnes & Noble Education Inc. Equity Incentive Plan (the "Equity Incentive Plan"). Types of equity awards that can be granted under the Equity Incentive Plan include options, restricted stock ("RS"), restricted stock units ("RSU") and performance awards. We have not granted options under the Equity Incentive Plan. See
Note 13. Stock-Based Compensation
for a further discussion of our stock-based incentive plan.
Currently, outstanding awards are not based on performance and are based solely on continued service. We recognize compensation expense for awards ratably over the requisite service period of the award. We calculate the fair value of stock-based awards based on the closing price on the date the award was granted. We recognize compensation expense based on the number of awards expected to vest using an estimated average forfeiture rate.
Advertising Costs
The costs of advertising are expensed as incurred during the year pursuant to ASC No. 720-35,
Advertising Costs
. Advertising costs charged to selling and administrative expenses were
$8,193
,
$8,614
, and
$8,421
during
Fiscal 2016, Fiscal 2015 and Fiscal 2014
, respectively.
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
Income Taxes
The provision for income taxes includes federal, state and local income taxes currently payable and those deferred because of temporary differences between the financial statement and tax basis of assets and liabilities. The deferred tax assets and liabilities are measured using the enacted tax rates and laws that are expected to be in effect when the differences reverse. We regularly review deferred tax assets for recoverability and establish a valuation allowance, if determined to be necessary. For additional information, see
Note 14. Income Taxes
.
Earnings Per Common Share
Basic earnings per share represent net earnings to common stockholders divided by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the impact of our stock based compensation. See
Note 6. Equity and Earnings Per Share
for further information regarding the calculation of basic and diluted earnings per common share.
Change in Accounting Principle and Error Corrections
As more fully described in
Note 3. Recent Accounting Policies
, during the fourth quarter of fiscal 2016, we adopted Accounting Standard Update (“ASU”) No. 2015-17,
Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes
("ASU 2015-17") retrospectively to simplify the presentation of deferred income taxes. The amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. We early adopted this standard during the fourth quarter of 2016 on a retrospective basis, which resulted in a reclassification of our net current deferred tax asset of
$24,358
to the net non-current deferred tax liability in our consolidated balance sheet as of May 2, 2015.
During the fourth quarter of fiscal 2016, we decreased cash and accounts payable by
$14,898
for the period ended as of May 2, 2015 as a result of an immaterial balance sheet error correction. This correction was to record outstanding payments and overdraft cash concentration balances as part of cash and cash equivalents account from the previously recorded accounts payable account. Management has assessed both quantitative and qualitative factors discussed in ASC No. 250,
Accounting Changes and Error Corrections
and Staff Accounting Bulletin 1.M,
Materiality
(SAB Topic 1.M) to determine that this misstatement qualifies as an immaterial balance sheet error correction. We concluded that this balance sheet misstatement is not material to an investor as it did not affect pre-tax income, net income, or earnings per share reported in the financial statements for any prior period financial statements. Additionally, this balance sheet misstatement did not affect the debt covenants under our Credit Facility.
As more fully described in
Note 9. Supplementary Information,
during the first quarter of fiscal 2016, we increased other long-term liabilities and decreased Parent company investment by
$63,459
for the period ended as of
May 2, 2015
, as a result of an immaterial balance sheet error correction.
Note 3.
Recent Accounting Pronouncements
Pronouncements Adopted in Fiscal 2016
In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
to provide guidance that changes the accounting for certain aspects of share-based payments to employees. The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid-in capital pools. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. We are required to adopt this standard in the first quarter of fiscal 2018, but have early adopted this standard during the fourth quarter of fiscal 2016 as permitted. There was no impact upon adoption of this guidance since the recognition of income tax effects of awards was not materially different than amounts that had previously been recorded in our financial statements and we currently use an estimated average forfeiture rate to compute stock-based compensation expense.
In March 2016, the FASB issued ASU No. 2016-04,
Liabilities-Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products (a consensus of the Emerging Issues Task Force)
to specify
how prepaid stored-value product liabilities should be derecognized. We are required to adopt this standard in the first quarter of fiscal 2018, but have early adopted this standard during the fourth quarter of fiscal 2016 as permitted. This standard does not have an impact on our consolidated financial statements since we sell prepaid cards for vendors and the liability for the prepaid cards is not reflected on our consolidated balance sheets.
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
In November 2015, the FASB issued ASU No. 2015-17,
Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes
("ASU 2015-17") to simplify the presentation of deferred income taxes. The amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this update. We are required to adopt this standard in the first quarter of fiscal 2018, but have early adopted this standard retrospectively during the fourth quarter of fiscal 2016 as permitted. This standard impacts the classification of current deferred income taxes presented on our consolidated financial statements for Fiscal 2015 and Fiscal 2016.
In September 2015, the FASB issued ASU No. 2015-16,
Business Combinations (Topic 805) - Simplifying the Accounting for Measurement-Period Adjustments
("ASU 2015-16") to simplify the accounting for measurement-period adjustments resulting from business combinations. The amendments in this update eliminate the requirement to retrospectively account for measurement-period adjustments. Instead, these adjustments will be recognized in the period the adjustment amount is determined. We are required to adopt this standard in the first quarter of fiscal 2017, but have early adopted this standard during the second quarter of fiscal 2016 as permitted. Adoption of this standard will impact our consolidated financial statements to the extent adjustments to provisional amounts recorded for future acquisitions are determined subsequent to the period the acquisition is originally reported.
In July 2015, the FASB issued ASU No. 2015-11,
Inventory (Topic 330) – Simplifying the Measurement of Inventory
(“ASU 2015-11”). The amendments in this update state that inventory should be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The update does not apply to inventory that is measured using last-in, first-out (“LIFO”) or the retail inventory method. The update applies to all other inventory, which includes inventory that is measured using first-in, first-out (“FIFO”) or average cost. We are required to adopt this standard in the first quarter of fiscal 2018, but have early adopted this standard during the first quarter of fiscal 2016 as permitted. This standard does not have an impact on our consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-05,
Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
(“ASU 2015-05”) to simplify the accounting for cloud computing arrangements. The amendments in this update requires that if a cloud computing arrangement includes a software license, then a customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change GAAP for a customer’s accounting for service contracts. We are required to adopt this standard in the first quarter of fiscal 2017, but have early adopted this standard during the fourth quarter of fiscal 2016 as permitted. This standard does not have an impact on our consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03,
Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
(“ASU 2015-03”) to simplify the presentation of debt issuance costs. The amendments in the update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction of the carrying amount of the debt. Recognition and measurement of debt issuance costs were not affected by this amendment. In August 2015, FASB issued ASU No. 2015-15,
“Presentation and Subsequent Measurement of Debt Issuance Costs Associated With Line-of-Credit Arrangements — Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting”
which clarified that the SEC would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement. We are required to adopt ASU 2015-03 in the first quarter of fiscal 2017, but have early adopted this standard during the first quarter of fiscal 2016 as permitted. As discussed in
Note 8. Credit Facility
, debt issuance costs related to the Credit Facility entered into on August 3, 2015 have been deferred and are presented as an asset which is subsequently amortized ratably over the term of the Credit Facility.
Pronouncements Pending Adoption
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
("ASU 2016-01") to increase transparency and comparability by providing additional information to users of financial statements regarding an entity's leasing activities. The revised guidance seeks to achieve this objective by requiring reporting entities to recognize lease assets and lease liabilities on the balance sheet for substantially all lease arrangements. We are required to adopt this standard in the first quarter of fiscal 2020 and early adoption is permitted. The guidance will be applied on a modified retrospective basis beginning with the earliest period presented. We are currently evaluating this standard to determine the impact of adoption on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”). The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. In 2016, the FASB issued final amendments to clarify the implementation guidance for principal versus agent considerations, identifying performance obligations and the accounting for licenses of intellectual property.
In August 2015, FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
, which effectively delayed the adoption date by one year. We are required to adopt ASU 2014-09 in the first quarter of fiscal 2019 and early adoption is permitted. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. We have not yet selected a transition method nor have we determined the impact of adoption on our consolidated financial statements.
Note 4. Acquisitions and Strategic Agreements
Acquisitions
LoudCloud Systems, Inc.
In March 2016, we completed the purchase of substantially all of the assets of LoudCloud Systems, Inc. (“LoudCloud”). LoudCloud will be a foundational asset for our digital and learning services. LoudCloud is a sophisticated digital platform and analytics provider with a proven product and existing clients in higher education, the for-profit sector and K-12 markets. LoudCloud currently has product capabilities that include a competency based courseware platform, a learning analytics platform and services, an eReading product, and a learning management system ("LMS"). Its software captures and analyzes key behavioral and performance metrics from students, allowing educators to monitor and improve student success.
The acquisition of LoudCloud closed on March 4, 2016 for a purchase price of
$17,843
, including working capital, and was financed completely with cash from operations. The preliminary allocation of the purchase price was based upon a preliminary valuation and our estimates and assumptions are subject to change within the purchase price allocation period (generally one year from the acquisition date). The preliminary purchase price was allocated primarily as follows:
$10,600
intellectual property,
$1,300
other intangible assets,
$1,003
deferred revenue and
$6,838
goodwill. This acquisition is not material to our consolidated financial statements and therefore, disclosure of pro forma financial information has not been presented. The results of operations reflect the period of ownership of the acquired business.
Strategic Agreements
Vital Source Technologies, Inc.
In March 2016, we entered into a strategic commercial agreement with Vital Source Technologies, Inc. ("VitalSource"), a part of the Ingram Content Group, and effectively outsourced the Yuzu
®
eTexbook reading platform. See
Note 9. Supplementary Information
for additional information
.
VitalSource has existing relationships with publishers and a very competitive product from a feature and technology perspective. VitalSource will continue to provide an eTextbook experience for Yuzu
®
users leveraging and utilizing a broad digital library and the product is branded and marketed to the students and universities as Yuzu
®
. The transition from Yuzu
®
to the VitalSource platform was seamless for students and faculty.
Microsoft Corporation
On April 27, 2012, Barnes & Noble entered into an investment agreement pursuant to which Barnes & Noble transferred to NOOK Media its digital device, digital content and college bookstore businesses. On October 4, 2012, Morrison Investment Holdings, Inc. (“Morrison”), a subsidiary of Microsoft Corporation (“Microsoft”), acquired a
17.6%
non-controlling preferred membership interest in NOOK Media. Concurrently with its entry into this agreement, Barnes & Noble also entered into a commercial agreement with Microsoft relating to the digital and college businesses investment. See
Note 10. Barnes & Noble, Inc. Transactions.
On December 3, 2014, the Microsoft commercial agreement was terminated. On December 4, 2014, we re-acquired Morrison’s interest in NOOK Media in exchange for cash and common stock of Barnes & Noble.
In connection with the closing, Morrison, Barnes & Noble and Barnes & Noble Education entered into a Digital Business Contingent Payment Agreement related to Barnes & Noble’s digital business (“DBCPA”). Effective as of August 2, 2015, all of Barnes & Noble Education’s obligations under the DBCPA were either assigned to Barnes & Noble or terminated.
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
Pearson Education, Inc.
On December 21, 2012, NOOK Media entered into an agreement with Pearson Education, Inc. a subsidiary of Pearson plc, to make a strategic investment in NOOK Media whereby Pearson acquired a
5%
non-controlling preferred membership interest in NOOK Media and received warrants to purchase up to an additional
5%
of NOOK Media under certain conditions. That transaction closed on January 22, 2013. See
Note 10. Barnes & Noble, Inc. Transactions.
At closing, NOOK Media and Pearson entered into a commercial agreement relating to the college business with respect to distributing Pearson content in connection with this strategic investment. On December 27, 2013, NOOK Media entered into an amendment to the commercial agreement that extended the term of the agreement and the timing of the measurement period to meet certain revenue share milestones.
On December 22, 2014, we re-acquired Pearson’s interest in NOOK Media and related warrants previously issued to Pearson in exchange for cash and common stock of Barnes & Noble. We remain a party to the commercial agreement with Pearson relating to the college business.
Note 5.
Segment Reporting
We have determined that we operate within one reportable segment.
We identified our single operating segment based on the way our business is managed (focusing on the financial information distributed) and the manner in which our chief operating decision maker allocates resources and assesses financial performance. Our international operations are not material and the majority of the revenue and total assets are within the United States.
Note 6.
Equity and Earnings Per Share
Equity
On February 26, 2015, Barnes & Noble announced plans to Spin-Off its 100% equity interest in our Company by distributing all of its equity interest in us, consisting of all of the outstanding shares of our Common Stock, to Barnes & Noble’s stockholders on a pro rata basis (the “Distribution”).
On July 14, 2015, Barnes & Noble approved the final distribution ratio and declared a pro rata dividend of the outstanding shares of our common stock to Barnes & Noble’s existing stockholders. The pro-rata dividend was made on August 2, 2015 to the Barnes & Noble stockholders of record (as of July 27, 2015). Each Barnes & Noble stockholder of record received a distribution of
0.632
shares of our common stock for each share of Barnes & Noble common stock held on the record date. On August 2, 2015, we completed the legal separation from Barnes & Noble, at which time we began to operate as an independent publicly-traded company. Following the Spin-Off, Barnes & Noble does not own any equity interest in us.
Following the Spin-Off on August 2, 2015, our authorized capital stock consisted of
200,000,000
shares of common stock, par value
$0.01
per share, and
5,000,000
shares of preferred stock, par value
$0.01
per share. As of August 3, 2015,
48,186,900
shares of our Common Stock and
0
shares of our preferred stock were issued and outstanding. Our Common Stock began to trade on a “when-issued” basis on the NYSE under the symbol “BNED WI” beginning on July 23, 2015. On August 3, 2015, when-issued trading of our Common Stock ended, and our Common Stock began “regular-way” trading under the symbol “BNED.”
The holders of our Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Holders of shares of our Common Stock do not have cumulative voting rights in the election of directors. The holders of our Common Stock will be entitled to share ratably in our assets legally available for distribution to our stockholders, subject to the prior distribution rights of preferred stock, if any, then outstanding. The holders of our Common Stock do not have preemptive rights or preferential rights to subscribe for shares of our capital stock.
During the second quarter,
2,409,345
shares of Common Stock were reserved for future grants, in accordance with the Barnes & Noble Education Inc. Equity Incentive Plan. See
Note 13. Stock-Based Compensation
.
Share Repurchases
On December 14, 2015, our Board of Directors authorized a stock repurchase program of up to
$50,000
, in the aggregate, of our outstanding Common Stock. The stock repurchase program is carried out at the direction of management (which includes a plan under Rule 10b5-1 of the Securities Exchange Act of 1934). The stock repurchase program may be suspended, terminated, or modified at any time. Any repurchased shares will be held as treasury stock and will be available for general corporate purposes. During the
52 weeks ended
April 30, 2016
, we repurchased
1,715,269
shares for approximately
$16,612
at a weighted average cost per share of
$9.95
.
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
During the
52 weeks ended
April 30, 2016
, we also repurchased
174,511
shares of our Common Stock in connection with employee tax withholding obligations for vested stock awards.
Dividends
We paid no dividends to common stockholders during
Fiscal 2016, Fiscal 2015 and Fiscal 2014
. We do not intend to pay dividends on our Common Stock in the foreseeable future.
Earnings Per Share
For periods prior to the Spin-Off from Barnes & Noble on August 2, 2015, basic earnings per share and weighted-average basic shares outstanding are based on the number of shares of Barnes & Noble, Inc. common stock outstanding as of the end of the period, adjusted for the distribution ratio of
0.632
shares of our Common Stock for every one share of Barnes & Noble, Inc. common stock held on the record date for the Spin-Off.
For periods prior to the Spin-Off, diluted earnings per share and weighted-average diluted shares outstanding reflect potential common shares from Barnes & Noble equity plans in which our employees participated. Certain of our employees held restricted stock units and stock options granted by Barnes & Noble, Inc. which were considered participating securities.
Basic EPS is computed based upon the weighted average number of common shares outstanding for the year. Diluted EPS is computed based upon the weighted average number of common shares outstanding for the year plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price of our common stock for the year. We include participating securities (unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents) in the computation of EPS pursuant to the two-class method. Our participating securities consist solely of unvested restricted stock awards, which have contractual participation rights equivalent to those of stockholders of unrestricted common stock. The two-class method of computing earnings per share is an allocation method that calculates earnings per share for common stock and participating securities. During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company. During the
Fiscal 2016, Fiscal 2015 and Fiscal 2014
, no shares were excluded from the diluted earnings per share calculation using the two-class method as they were not antidilutive.
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
The following is a reconciliation of the basic and diluted earnings per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016
|
|
Fiscal 2015
|
|
Fiscal 2014
|
Numerator for basic earnings per share:
|
|
|
|
|
|
Net income
|
$
|
84
|
|
|
$
|
19,132
|
|
|
$
|
35,106
|
|
Accretion of dividends on preferred stock
|
—
|
|
|
(6,076
|
)
|
|
(1,770
|
)
|
Less allocation of earnings to participating securities
|
—
|
|
|
(313
|
)
|
|
(663
|
)
|
Net income available to common shareholders
|
$
|
84
|
|
|
$
|
12,743
|
|
|
$
|
32,673
|
|
|
|
|
|
|
|
Numerator for diluted earnings per share:
|
|
|
|
|
|
Net income available to common shareholders
|
$
|
84
|
|
|
$
|
12,743
|
|
|
$
|
32,673
|
|
Accretion of dividends on preferred stock
(a)
|
—
|
|
|
—
|
|
|
—
|
|
Allocation of earnings to participating securities
|
—
|
|
|
313
|
|
|
663
|
|
Less diluted allocation of earnings to participating securities
|
—
|
|
|
(313
|
)
|
|
(663
|
)
|
Net income available to common shareholders
|
$
|
84
|
|
|
$
|
12,743
|
|
|
$
|
32,673
|
|
|
|
|
|
|
|
Denominator for basic earnings per share:
(b)
|
|
|
|
|
|
Basic weighted average shares of Common Stock
|
46,238
|
|
|
38,452
|
|
|
37,270
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share:
(c)
|
|
|
|
|
|
Basic weighted average shares of Common Stock
|
46,238
|
|
|
38,452
|
|
|
37,270
|
|
Average dilutive restricted stock units
|
227
|
|
|
—
|
|
|
—
|
|
Average dilutive options
|
14
|
|
|
41
|
|
|
5
|
|
Diluted weighted average shares of Common Stock
|
46,479
|
|
|
38,493
|
|
|
37,275
|
|
|
|
|
|
|
|
Earnings per share of Common Stock:
|
|
|
|
|
|
Basic
|
$
|
—
|
|
|
$
|
0.33
|
|
|
$
|
0.88
|
|
Diluted
|
$
|
—
|
|
|
$
|
0.33
|
|
|
$
|
0.88
|
|
|
|
(a)
|
Although the Company was in a net income position during
Fiscal 2016, Fiscal 2015 and Fiscal 2014
, the dilutive effect of the accretion of preferred membership interests were excluded from the calculation of income per share using the two-class method because the effect would be antidilutive.
|
|
|
(b)
|
For periods prior to the Spin-Off from Barnes & Noble, Inc. on August 2, 2015, basic earnings per share and weighted-average basic shares outstanding are based on the number of shares of Barnes & Noble, Inc. common stock outstanding as of the end of the period, adjusted for the distribution ratio of
0.632
shares of our Common Stock for every one share of Barnes & Noble, Inc. common stock held on the record date for the Spin-Off.
|
|
|
(c)
|
For periods prior to the Spin-Off, diluted earnings per share and weighted-average diluted shares outstanding reflect potential common shares from Barnes & Noble, Inc. equity plans in which our employees participated. Certain of our employees held restricted stock units and stock options granted by Barnes & Noble, Inc. which were considered participating securities.
|
Note 7.
Fair Values of Financial Instruments
In accordance with ASC No. 820,
Fair Value Measurements and Disclosures
, the fair value of an asset is considered to be the price at which the asset could be sold in an orderly transaction between unrelated knowledgeable and willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Assets and liabilities recorded at fair value are measured using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
Level 1—Observable inputs that reflect quoted prices in active markets
Level 2—Inputs other than quoted prices in active markets that are either directly or indirectly observable
Level 3—Unobservable inputs in which little or no market data exists, therefore requiring us to develop our own assumptions
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
Our financial instruments include cash and cash equivalents, receivables, accrued liabilities and accounts payable. The fair values of cash and cash equivalents, receivables, accrued liabilities and accounts payable approximates their carrying values because of the short-term nature of these instruments, which are all considered Level 1.
Note 8.
Credit Facility
Until August 3, 2015, we were party to an amended and restated credit facility with Barnes & Noble, Inc., as the lead borrower, and Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and other lenders, dated as of April 29, 2011 (as amended and modified to date, the “B&N Credit Facility”). The B&N Credit Facility provided for up to
$1,000,000
in aggregate commitments under a five-year asset-backed revolving credit facility expiring on
April 29, 2016
. The B&N Credit Facility was secured by eligible inventory and accounts receivable with the ability to include eligible real estate and related assets. We were a borrower and co-guarantor of all amounts owing under the B&N Credit Facility. All outstanding debt under the B&N Credit Facility was recorded on Barnes & Noble, Inc.'s balance sheet as of August 1, 2015.
On August 3, 2015, we and certain of our subsidiaries, from time to time party thereto, entered into a credit agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and other lenders, from time to time party thereto, under which the lenders committed to provide us with a
five
-year asset-backed revolving credit facility in an aggregate committed principal amount of
$400,000
(the “BNED Credit Facility”). Proceeds from the BNED Credit Facility will be used for general corporate purposes, including seasonal working capital needs. Bank of America Merrill Lynch, J.P. Morgan Securities LLC, Wells Fargo Bank, N.A. and SunTrust Robinson Humphrey, Inc. are the joint lead arrangers for the BNED Credit Facility.
We and certain of its subsidiaries (collectively, the “Loan Parties”) will be permitted to borrow under the BNED Credit Facility. The BNED Credit Facility is secured by substantially all of the inventory, accounts receivable and related assets of the borrowers under the BNED Credit Facility, but excluding the equity interests in us and our subsidiaries, intellectual property, equipment and certain other property. We have the option to request an increase in commitments under the BNED Credit Facility of up to
$100,000
, subject to certain restrictions.
As of
April 30, 2016
, we had no outstanding borrowings under the BNED Credit Facility. During the
52 weeks ended
April 30, 2016
, we borrowed and repaid
$60,600
under the BNED Credit Facility. As of
April 30, 2016
, we have issued
$3,567
in letters of credit under the facility.
We incurred debt issuance costs totaling
$3,251
related to the BNED Credit Facility. As permitted under ASU No. 2015-15, the debt issuance costs have been deferred and are presented as an asset which is subsequently amortized ratably over the term of the credit agreement.
Interest under the BNED Credit Facility accrues, at our election, at a LIBOR or alternate base rate, plus, in each case, an applicable interest rate margin, which is determined by reference to the level of excess availability under the BNED Credit Facility. Loans will initially bear interest at LIBOR plus
2.000%
per annum, in the case of LIBOR borrowings, or at the alternate base rate plus
1.000%
per annum, in the alternative, and thereafter the interest rate will fluctuate between LIBOR plus
2.000%
per annum and LIBOR plus
1.750%
per annum (or between the alternate base rate plus
1.000%
per annum and the alternate base rate plus
0.750%
per annum), based upon the excess availability under the BNED Credit Facility at such time.
The Credit Agreement contains customary negative covenants, which limit our ability to incur additional indebtedness, create liens, make investments, make restricted payments or specified payments and merge or acquire assets, among other things. In addition, if excess availability under the BNED Credit Facility were to fall below certain specified levels, certain additional covenants (including fixed charge coverage ratio requirements) would be triggered, and the lenders would have the right to assume dominion and control over the Loan Parties’ cash.
The Credit Agreement contains customary events of default, including payment defaults, material breaches of representations and warranties, covenant defaults, default on other material indebtedness, customary ERISA events of default, bankruptcy and insolvency, material judgments, invalidity of liens on collateral, change of control or cessation of business. The Credit Agreement also contains customary affirmative covenants and representations and warranties. We are in compliance with all covenants, representations and warranties under the Credit Agreement as of April 30, 2016.
We believe that our future cash from operations, access to borrowings under the BNED Credit Facility and short-term vendor financing will provide adequate resources to fund our operating and financing needs for the foreseeable future. Our access to, and the availability of, financing in the future will be impacted by many factors, including our credit rating, the liquidity of the overall capital markets and the current state of the economy. There can be no assurances that we will have access to capital markets on acceptable terms.
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
Note 9.
Supplementary Information
Impairment Loss (non-cash) and Restructuring Costs
In Fiscal 2016, we implemented a plan to restructure our digital operations. As a result of this restructuring, we recorded a non-cash impairment loss of
$11,987
related to all of the capitalized content costs for the Yuzu
®
eTextbook platform (
$8,987
) based on the probability of recoverability of the capitalized content costs, and recorded a non-recurring other than temporary loss related to an investment held at cost
($3,000)
, whose fair value has been reduced to
$0
based on the financial projections of the investment.
Additionally, we announced a reduction in staff and closure of the facilities in Mountain View, California, and Redmond, Washington that support the Yuzu
®
eTextbook platform. We recorded restructuring costs of
$8,830
in fiscal 2016 comprised of
$3,216
in employee related costs (including severance and retention), facility exit costs of
$5,046
and
$568
related to specific contracts. We expect the restructuring to be completed in the first quarter of fiscal 2017.
Intangible Assets
Amortizable intangible assets as of
April 30, 2016
and
May 2, 2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2016
|
Amortizable intangible assets
|
|
Remaining
Life
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Total
|
Customer relationships
|
|
10 - 18
|
|
$
|
255,050
|
|
|
$
|
(67,151
|
)
|
|
$
|
187,899
|
|
Technology
|
|
10
|
|
10,600
|
|
|
(177
|
)
|
|
10,423
|
|
Other
|
|
1 - 9
|
|
1,605
|
|
|
(264
|
)
|
|
1,341
|
|
|
|
|
|
$
|
267,255
|
|
|
$
|
(67,592
|
)
|
|
$
|
199,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of May 2, 2015
|
Amortizable intangible assets
|
|
Remaining
Life
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Total
|
Customer relationships
|
|
19
|
|
$
|
255,000
|
|
|
$
|
(56,950
|
)
|
|
$
|
198,050
|
|
Other
|
|
2 - 10
|
|
305
|
|
|
(165
|
)
|
|
140
|
|
|
|
|
|
$
|
255,305
|
|
|
$
|
(57,115
|
)
|
|
$
|
198,190
|
|
All amortizable intangible assets are being amortized over their useful life on a straight-line basis.
|
|
|
|
|
Aggregate Amortization Expense:
|
|
For the 52 weeks ended April 30, 2016
|
$
|
10,477
|
|
For the 52 weeks ended May 2, 2015
|
$
|
10,252
|
|
For the 53 weeks ended May 3, 2014
|
$
|
10,294
|
|
|
|
|
|
|
Estimated Amortization Expense: (Fiscal Year)
|
|
2017
|
$
|
11,585
|
|
2018
|
$
|
11,542
|
|
2019
|
$
|
11,534
|
|
2020
|
$
|
11,506
|
|
2021
|
$
|
11,468
|
|
After 2021
|
$
|
142,028
|
|
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
Goodwill
The following table details the changes in carrying value of goodwill (in millions):
|
|
|
|
|
|
Balance at May 3, 2014
|
|
$
|
274,070
|
|
Goodwill related to acquisitions
|
|
—
|
|
Balance at May 2, 2015
|
|
$
|
274,070
|
|
Goodwill related to acquisitions, including foreign currency translation (see Note 4)
|
|
6,841
|
|
Balance at April 30, 2016
|
|
$
|
280,911
|
|
As of April 30, 2016, goodwill of approximately
$6,575
was deductible for federal income tax purposes.
Other Long-Term Liabilities
Other long-term liabilities consist primarily of tax liabilities related to the long-term tax payable associated with the LIFO reserve and deferred management service agreement costs related to college and university contracts. We provide for minimum contract expense over the contract terms on a straight-line basis. The excess of such minimum contract expense over actual contract payments (net of school allowances) is reflected in other long-term liabilities and accrued liabilities in the consolidated balance sheets.
We had the following long-term liabilities at
April 30, 2016
and
May 2, 2015
:
|
|
|
|
|
|
|
|
|
|
April 30,
2016
|
|
May 2,
2015
|
Tax liabilities and reserves
|
$
|
69,345
|
|
|
$
|
63,673
|
|
Deferred contract obligations
(a)
|
4,164
|
|
|
4,082
|
|
Other
|
1,871
|
|
|
1,733
|
|
Total other long-term liabilities
|
$
|
75,380
|
|
|
$
|
69,488
|
|
|
|
(a)
|
Contract obligations primarily consist of the payments we make to the colleges and universities to operate their official bookstores (management service agreement costs), including rent expense.
|
As a result of an immaterial balance sheet error correction, during the first quarter of fiscal 2016, we increased other long-term liabilities and decreased Parent company investment by
$63,459
for the period ended as of
May 2, 2015
. This correction related to the long-term tax payable associated with the LIFO reserve which was previously deemed contributed to Parent company capital as an intercompany liability, along with other income tax liabilities associated with our operations. The liability should not have been deemed contributed as the long-term obligation to the tax authority is required to stay with Barnes & Noble Education, Inc. as that entity would be legally obligated to pay that amount if required. Management believes it is remote that the long-term tax payable associated with the LIFO reserve will be payable or will result in a cash tax payment in the foreseeable future, assuming that LIFO will continue to be an acceptable inventory method for tax purposes. Management has assessed both quantitative and qualitative factors discussed in ASC No. 250,
Accounting Changes and Error Corrections
and Staff Accounting Bulletin 1.M,
Materiality
(SAB Topic 1.M) to determine that this misstatement qualifies as an immaterial balance sheet error correction. We concluded that this balance sheet misstatement is not material to an investor as it did not affect pre-tax income, net income, earnings per share or amounts reported in the statement of cash flows for any prior period financial statements.
Note 10.
Barnes & Noble, Inc. Transactions
Our History with Barnes & Noble, Inc.
On September 30, 2009, Barnes & Noble acquired Barnes & Noble College Booksellers, LLC from Leonard and Louise Riggio. From that date until October 4, 2012, Barnes & Noble College Booksellers, LLC was wholly owned by Barnes & Noble Booksellers, Inc., a wholly owned subsidiary of Barnes & Noble. We were initially incorporated under the name NOOK Media Inc. in July 2012 to hold Barnes & Noble’s college and digital businesses. On October 4, 2012, Microsoft Corporation (“Microsoft”) acquired a
17.6%
non-controlling preferred membership interest in our subsidiary NOOK Media LLC (“NOOK Media”), and through us, Barnes & Noble maintained an
82.4%
controlling interest of the college and digital businesses.
On January 22, 2013, Pearson Education, Inc. (“Pearson”) acquired a
5%
non-controlling preferred membership interest in NOOK Media, received warrants to purchase an additional preferred membership interest in NOOK Media and entered into a commercial agreement with NOOK Media relating to the college business. See
Note 4. Acquisitions and Strategic Agreements
.
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
On December 4, 2014, we re-acquired Microsoft’s interest in NOOK Media in exchange for cash and common stock of Barnes & Noble. On December 22, 2014, we also re-acquired Pearson’s interest in NOOK Media and related warrants previously issued to Pearson in exchange for cash and common stock of Barnes & Noble. As a result of these transactions, Barnes & Noble owned
100%
of our Company prior to the Spin-Off. See
Note 4. Acquisitions and Strategic Agreements
.
In February 2015, we changed our name from NOOK Media Inc. to Barnes & Noble Education, Inc. and NOOK Media’s name to B&N Education, LLC. On February 26, 2015, Barnes & Noble announced plans to Spin-Off its
100%
equity interest in our Company.
On May 1, 2015, we distributed to Barnes & Noble all of the membership interests in NOOK Digital LLC (formerly known as barnesandnoble.com llc), which owns the NOOK digital business and which will continue to be owned by Barnes & Noble. At such time, we ceased to own any interest in the NOOK digital business. These consolidated financial statements retroactively reflect the reorganization of NOOK Media Inc. as described above.
On June 5, 2015, Barnes & Noble entered into conversion agreements with certain beneficial owners of the Series J Preferred Stock, pursuant to which such beneficial owners agreed to convert an aggregate of
103,995
shares of Series J Preferred Stock into
6,117,342
shares of Barnes & Noble common stock (the “Voluntary Conversion”). The Voluntary Conversion took place on July 9, 2015, at which time the
103,995
shares of Series Preferred Stock subject to the Voluntary Conversion were retired by Barnes & Noble.
On July 10, 2015, Barnes & Noble gave notice of its exercise of the right to force the conversion of all
100,005
remaining outstanding shares of Series J Preferred Stock into approximately
6.0 million
shares of Barnes & Noble common stock (the “Forced Conversion”). The Forced Conversion occurred on July 24, 2015, at which time such remaining
100,005
shares of Series J Preferred Stock subject to the Forced Conversion were retired.
At the time of the Spin-Off on August 2, 2015, Barnes & Noble distributed all of its equity interest in us, consisting of all of the outstanding shares of our Common Stock, to Barnes & Noble’s stockholders on a pro rata basis (the “Distribution”). Following the Spin-Off, Barnes & Noble does not own any equity interest in us. On August 2, 2015, we completed the legal separation from Barnes & Noble, at which time we began to operate as an independent publicly-traded company.
Allocation of General Corporate Expenses from Barnes & Noble (Prior to Spin-Off)
The results of operations for the 13 weeks ended August 1, 2015, Fiscal 2015, Fiscal 2014 (periods presented prior to the Spin-Off collectively referred to as the "stand-alone periods") reflected in our consolidated financial statements are presented on a stand-alone basis since we were still part of Barnes & Noble, Inc.
Our consolidated financial statements were derived from the consolidated financial statements and accounting records of Barnes & Noble. Our consolidated financial statements include certain assets and liabilities that have historically been held at the Barnes & Noble corporate level but are specifically identifiable or otherwise attributable to us.
All intercompany transactions between us and Barnes & Noble have been included in our consolidated financial statements and are considered to be effectively settled for cash in our consolidated financial statements at the time the Spin-Off became effective. The total net effect of the settlement of these intercompany transactions was reflected in our consolidated statements of cash flow as a financing activity and in our consolidated balance sheets as “Parent company investment.”
The consolidated financial statements for the stand-alone periods include an allocation for certain corporate and shared service functions historically provided by Barnes & Noble, including, but not limited to, executive oversight, accounting, treasury, tax, legal, human resources, procurement, information technology and other shared services. These expenses have been allocated to us on the basis of direct usage when identifiable, with the remainder allocated on a pro rata basis of consolidated sales, headcount, tangible assets or other measures considered to be a reasonable reflection of the historical utilization levels of these services. Following the Spin-Off on August 2, 2015, we began to perform these functions using our own resources or contracted services, certain of which may be provided by Barnes & Noble during a transitional period pursuant to the Transition Services Agreement.
Direct Costs Incurred Related to On-going Agreements with Barnes & Noble (Subsequent to the Spin-Off)
The Spin-Off from Barnes & Noble, Inc. occurred on August 2, 2015 and therefore, the results of operations are presented on a consolidated basis for the 39 weeks ended
April 30, 2016
(i.e. second, third and fourth quarter of fiscal 2016, period after the Spin-Off) which includes direct costs incurred with Barnes & Noble under various agreements.
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
In connection with the separation from Barnes & Noble, we entered into a Separation and Distribution Agreement with Barnes & Noble on July 14, 2015 and several other ancillary agreements on August 2, 2015. These agreements govern the relationship between the parties after the separation and allocate between the parties various assets, liabilities, rights and obligations following the separation, including inventory purchases, employee benefits, intellectual property, information technology, insurance and tax-related assets and liabilities. The agreements also describe Barnes & Noble’s future commitments to provide us with certain transition services following the Spin-Off. These agreements include the following:
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•
|
a Separation and Distribution Agreement that set forth Barnes & Noble’s and our agreements regarding the principal actions that both parties took in connection with the Spin-Off and aspects of our relationship following the Spin-Off. The term of the agreement is perpetual after the Distribution date;
|
|
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•
|
a Transition Services Agreement pursuant to which Barnes & Noble agreed to provide us with specified services for a limited time to help ensure an orderly transition following the Distribution. The Transition Services Agreement specifies the calculation of our costs for these services. The agreement will expire and services under it will cease no later than two years following the Distribution date or sooner in the event we no longer require such services;
|
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•
|
a Tax Matters Agreement governs the respective rights, responsibilities and obligations of Barnes & Noble and us after the Spin-Off with respect to all tax matters (including tax liabilities, tax attributes, tax returns and tax contests). The agreement will expire after two years following the Distribution date;
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•
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an Employee Matters Agreement with Barnes & Noble addressing employment, compensation and benefits matters including the allocation and treatment of assets and liabilities arising out of employee compensation and benefits programs in which our employees participated prior to the Spin-Off. The agreement will expire and services under it will cease when we no longer require such services; and
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•
|
a Trademark License Agreement pursuant to which Barnes & Noble grants us an exclusive license in certain licensed trademarks and a non-exclusive license in other licensed trademarks. The term of the agreement is perpetual after the Distribution date.
|
A description of the material terms and conditions of these agreements can be found in the Prospectus dated July 15, 2015 and filed with the SEC on that date. The descriptions of the Transition Services Agreement, Tax Matters Agreement, Employee Matters Agreement and Trademark License Agreement are qualified in their entirety by reference to the full text of the Transition Services Agreement, Tax Matters Agreement, Employee Matters Agreement and Trademark License Agreement, which are attached as Exhibits 10.1, 10.2, 10.3 and 10.4, respectively, to the Current Report on Form 8-K dated August 2, 2015 and filed with the SEC on August 3, 2015. The description of the Separation and Distribution Agreement is qualified in its entirety by reference to the full text of the Separation and Distribution Agreement, which is attached as Exhibit 2.1 to the Quarterly Report on Form 10-Q dated August 1, 2015 and filed with the SEC on September 10, 2015.
Summary of Transactions with Barnes & Noble
During the 39 weeks ended
April 30, 2016
(i.e. second, third and fourth quarter of fiscal 2016, periods presented after the Spin-Off), we were billed
$22,673
for purchases of inventory and direct costs incurred under the agreements discussed above which are included as cost of sales and selling, general and administrative expense in the consolidated statements of operations.
During the 13 weeks ended August 1, 2015, Fiscal 2015, Fiscal 2014 (periods presented prior to the Spin-Off), we were allocated
$13,321
,
$43,523
, and
$56,481
, respectively, of general corporate expenses incurred by Barnes & Noble and purchases of inventory which are included as cost of sales and selling, general and administrative expense in the consolidated statements of operations. For information related to allocated stock-based compensation expense, see
Note 13. Stock-Based Compensation
.
As of
April 30, 2016
, amounts due to Barnes & Noble, Inc. for book purchases and direct costs incurred under the agreements discussed above was
$5,246
and is included in accounts payable and accrued liabilities in the consolidated balance sheets.
All intercompany transactions between us and Barnes & Noble have been included in our consolidated financial statements and are considered to be effectively settled for cash in our consolidated financial statements at the time the Spin-Off is recorded. The total net effect of the settlement of these intercompany transactions is reflected in our consolidated statements of cash flow as a financing activity and in the consolidated balance sheets as “Parent company investment.” As of
May 2, 2015
, amounts due from Barnes & Noble, Inc. related to intercompany loans, net of corporate allocations, income taxes, and purchases of inventory was
$38,241
and is included in Parent Company Investment in the consolidated balance sheets.
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
Note 11.
Related Party Transactions
MBS Textbook Exchange, Inc.
We have a long-term supply agreement (“Supply Agreement”) with MBS Textbook Exchange, Inc. (“MBS”), which is majority owned by Leonard Riggio, who is a principal owner holding substantial shares of our common stock, and other members of the Riggio family. MBS is a new and used textbook wholesaler, which also sells textbooks online and provides bookstore systems and distant learning distribution services. Pursuant to the Supply Agreement, which terminates by its terms in 2019, subject to automatic renewals thereafter if a party does not object 180 days prior to each annual renewal date, and subject to availability and competitive terms and conditions, we will continue to purchase new and used printed textbooks for a given academic term from MBS prior to buying them from other suppliers, other than in connection with student buy-back programs. Total purchases from MBS were
$57,981
,
$54,353
, and
$70,127
for
Fiscal 2016, Fiscal 2015 and Fiscal 2014
, respectively. Additionally, the Supply Agreement provides that we may sell to MBS certain textbooks that we cannot return to suppliers or use in our stores. MBS pays us commissions based on the volume of these textbooks sold to MBS each year and with respect to the textbook requirements of certain distance learning programs that MBS fulfills on our behalf. MBS paid us
$5,009
,
$5,512
, and
$7,097
related to these commissions in
Fiscal 2016, Fiscal 2015 and Fiscal 2014
, respectively. In addition, the Supply Agreement contains restrictive covenants that limit our ability to become a used textbook wholesaler and that place certain limitations on MBS’s business activities. We also entered into an agreement with MBS in Fiscal 2011 pursuant to which MBS purchases books from us, which have no resale value for a flat rate per box. Total sales to MBS under this program were
$574
,
$419
, and
$602
for
Fiscal 2016, Fiscal 2015 and Fiscal 2014
, respectively. Total outstanding amounts payable to MBS for all arrangements net of any amounts due were
$21,543
and
$26,354
for Fiscal 2016 and Fiscal 2015, respectively.
Note 12.
Employees’ Defined Contribution Plan
Prior to the Spin-Off on August 2, 2015, Barnes & Noble, Inc. sponsored the defined contribution plan (the “Savings Plan”) for the benefit of substantially all of our employees. Total contributions charged to employee benefit expenses for the Savings Plan prior to the Spin-Off were based on amounts allocated to us on the basis of direct usage. See
Note 10. Barnes & Noble, Inc. Transactions
.
Subsequent to the Spin-Off, we established a 401(k) plan and Barnes & Noble, Inc. transferred to it the 401(k) plan assets relating to the account balances of our employees. Additionally, we are responsible for employer contributions to the Savings Plan and fund the contributions directly.
Total contributions charged to employee benefit expenses for the Savings Plan were
$4,375
,
$3,907
, and
$3,475
during
Fiscal 2016, Fiscal 2015 and Fiscal 2014
, respectively.
Note 13.
Stock-Based Compensation
Barnes & Noble’s Equity Plans Prior to Spin-Off
Prior to the Spin-Off, certain of our employees were eligible to participate in Barnes & Noble, Inc. equity plans pursuant to which they were granted awards of Barnes & Noble, Inc. common stock. Under these equity plans, our employees were granted restricted stock units, restricted stock and stock options.
Barnes & Noble, Inc. recognized stock-based compensation costs, net of estimated forfeitures, for only those shares expected to vest on a straight-line basis over the requisite service period of the award. Barnes & Noble, Inc. estimated the forfeiture rates based on its historical experience. The fair market value of restricted stock was determined based on the closing price of Barnes & Noble, Inc.’s common stock on the grant date. Barnes & Noble, Inc. used the Black-Scholes option-pricing model to value Barnes & Noble, Inc.’s stock options for each stock option award.
The equity-based payments recorded by us prior to the Spin-Off included the expense associated with our employees.
Current Equity Plans
During the second quarter of Fiscal 2016, post Spin-Off, we reserved
2,409,345
shares of our Common Stock for future grants in accordance with the Barnes & Noble Education Inc. Equity Incentive Plan (the "Equity Incentive Plan"). Types of equity awards that can be granted under the Equity Incentive Plan include options, restricted stock ("RS"), restricted stock units ("RSU") and performance awards. We have not granted options under the Equity Incentive Plan.
A restricted stock award is an award of common stock that is subject to certain restrictions during a specified period. Restricted stock awards are generally subject to forfeiture if employment terminates prior to the release of the restrictions. The grantee cannot transfer the shares before the restricted shares vest. Shares of unvested restricted stock have the same voting rights as common
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
stock, are entitled to receive dividends and other distributions thereon and are considered to be currently issued and outstanding. Restricted stock awards vest over a period of one year.
A restricted stock unit is a grant valued in terms of our common stock, but no stock is issued at the time of grant. Each restricted stock unit may be redeemed for one share of our common stock once vested. Restricted stock units are generally subject to forfeiture if employment terminates prior to the release of the restrictions. The grantee cannot transfer the units except in very limited circumstances and with the consent of the compensation committee. Shares of unvested restricted stock units have no voting rights but are entitled to receive dividends and other distributions thereon. Restricted stock units vest over a period of three years.
Currently, outstanding awards are not based on performance and are based solely on continued service. We recognize compensation expense for awards ratably over the requisite service period of the award. We recognize compensation expense based on the number of awards expected to vest using an estimated average forfeiture rate. We calculate the fair value of stock-based awards based on the closing price on the date the award was granted.
Stock-Based Compensation Activity
Since the Spin-Off on August 2, 2015, we have granted the following awards:
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•
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Barnes & Noble RSU awards held by our employees (or transferred employees) were converted to
877,426
shares of our RSUs with substantially the same vesting schedule as the forfeited awards. Compensation expense for these awards will continue to be recognized ratably over the remaining term of the unvested awards of approximately two years;
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•
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27,272
BNED RS awards were granted to former Barnes & Noble BOD members involved in the Spin-Off transaction. The awards vested during the 13 weeks ended October 31, 2015;
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•
|
804,126
BNED RSU awards were granted to employees in accordance with Equity Incentive Plan;
|
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•
|
46,080
BNED RS awards were granted to the current BOD members for annual director compensation with a one year vesting period in accordance with Equity Incentive Plan.
|
The following table presents a summary of restricted stock awards and restricted stock units activity related to our current Equity Incentive Plan:
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Restricted Stock Awards
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Restricted Stock Units
|
|
|
Number of Shares
|
|
Weighted Average
Grant Date Fair Value
|
|
Number of Shares
|
|
Weighted Average
Grant Date Fair Value
|
Balance, August 2, 2015
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|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Granted (a)
|
|
73,352
|
|
|
$
|
13.08
|
|
|
1,681,552
|
|
|
$
|
10.12
|
|
Vested
|
|
(27,272
|
)
|
|
$
|
13.19
|
|
|
(431,106
|
)
|
|
$
|
7.29
|
|
Forfeited
|
|
—
|
|
|
$
|
—
|
|
|
(8,979
|
)
|
|
$
|
9.92
|
|
Balance, April 30, 2016
|
|
46,080
|
|
|
$
|
13.02
|
|
|
1,241,467
|
|
|
$
|
11.10
|
|
(a) Restricted Stock Units include the
877,426
converted RSU shares discussed above.
Total fair value of shares of restricted stock awards and restricted stock units that vested since the inception of Equity Incentive Plan was
$360
and
$3,143
, respectively.
Stock-Based Compensation Expense
We recognized stock-based compensation expense for equity-based awards in selling and administrative expenses as follows:
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|
Fiscal 2016
|
|
Fiscal 2015
|
|
Fiscal 2014
|
Restricted Stock Expense
|
$
|
840
|
|
|
$
|
306
|
|
|
$
|
—
|
|
Restricted Stock Units Expense
|
5,710
|
|
|
3,757
|
|
|
1,943
|
|
Stock Option Expense
|
120
|
|
|
678
|
|
|
430
|
|
Stock-Based Compensation Expense
|
$
|
6,670
|
|
|
$
|
4,741
|
|
|
$
|
2,373
|
|
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
In the 13 weeks ended August 1, 2015, Fiscal 2015, Fiscal 2014 (periods presented prior to the Spin-Off), Barnes & Noble allocated stock compensation expense to us, which includes stock compensation expense related to our employees, as well as an allocation from Barnes & Noble for our pro-rated share of corporate employees.
Total unrecognized compensation cost related to unvested awards as of
April 30, 2016
was
$10,795
and is expected to be recognized over a weighted-average period of
2
years.
Note 14.
Income Taxes
Our operating results have been included in the consolidated U.S. federal and state income tax returns of Barnes & Noble for all periods ending on or before the consummation of the Spin-Off on August 2, 2015. Amounts presented in these consolidated financial statements related to income taxes have been determined on a separate tax return basis as it relates to those periods. Amounts presented in these consolidated financial statements related to income taxes for periods ending after the consummation of the Spin-Off are presented on a consolidated basis as we became a separate consolidated entity
For Fiscal 2016, Fiscal 2015 and Fiscal 2014, we had no material revenue or expense in jurisdictions outside the United States.
Income tax provisions (benefits) for
Fiscal 2016, Fiscal 2015 and Fiscal 2014
are as follows:
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Fiscal 2016
|
|
Fiscal 2015
|
|
Fiscal 2014
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
13,019
|
|
|
$
|
22,061
|
|
|
$
|
27,574
|
|
State
|
|
1,783
|
|
|
3,489
|
|
|
5,222
|
|
Total current
|
|
14,802
|
|
|
25,550
|
|
|
32,796
|
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Deferred:
|
|
|
|
|
|
|
Federal
|
|
(9,922
|
)
|
|
(10,247
|
)
|
|
(8,493
|
)
|
State
|
|
(2,213
|
)
|
|
(1,085
|
)
|
|
(1,469
|
)
|
Total deferred
|
|
(12,135
|
)
|
|
(11,332
|
)
|
|
(9,962
|
)
|
Total
|
|
$
|
2,667
|
|
|
$
|
14,218
|
|
|
$
|
22,834
|
|
Reconciliation between the effective income tax rate and the federal statutory income tax rate is as follows:
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Fiscal 2016
|
|
Fiscal 2015
|
|
Fiscal 2014
|
Federal statutory income tax rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal income tax benefit
|
|
(15.2
|
)
|
|
4.7
|
|
|
4.3
|
|
Valuation allowances
|
|
50.6
|
|
|
—
|
|
|
—
|
|
Permanent book / tax differences
|
|
31.1
|
|
|
—
|
|
|
—
|
|
Other, net
|
|
(4.6
|
)
|
|
2.9
|
|
|
0.1
|
|
Effective income tax rate
|
|
96.9
|
%
|
|
42.6
|
%
|
|
39.4
|
%
|
One percentage point on our effective tax rate is approximately
$28
. State income taxes benefited from certain state and local income tax credits as well as a change in applicable income tax rates and apportionment factors. The valuation allowance relates to deferred tax assets associated with certain restructuring charges. The permanent book / tax differences are principally comprised of non-deductible compensation and meals and entertainment costs.
In March 2016, the FASB issued ASU No. 2016-09 to provide guidance that changes the accounting for certain aspects of share-based payments to employees. The guidance requires, among other things, the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid-in capital pools. We are required to adopt this standard in the first quarter of fiscal 2018, but have early adopted this standard during the fourth quarter of fiscal 2016 as permitted. Prior to Fiscal Year 2016, we had no windfall benefits. There was no material impact upon adoption of this guidance since the recognition of income tax effects of awards was not materially different than amounts that had previously been recorded in our financial statements.
We account for income taxes using the asset and liability method. Deferred taxes are recorded based on differences between the financial statement basis and tax basis of assets and liabilities and available tax loss and credit carryforwards.
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
The significant components of our deferred taxes consisted of the following:
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As of
|
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April 30, 2016
|
|
May 2, 2015
|
Deferred tax assets:
|
|
|
|
|
Estimated accrued liabilities
|
|
$
|
13,859
|
|
|
$
|
13,241
|
|
Inventory
|
|
12,926
|
|
|
12,941
|
|
Stock-based compensation
|
|
1,648
|
|
|
1,351
|
|
Insurance liability
|
|
1,050
|
|
|
921
|
|
Lease transactions
|
|
2,138
|
|
|
1,580
|
|
Property and equipment
|
|
6,802
|
|
|
4,075
|
|
Tax credits
|
|
112
|
|
|
—
|
|
Net operating losses
|
|
3,477
|
|
|
—
|
|
Other
|
|
1,499
|
|
|
840
|
|
Gross deferred tax assets
|
|
43,511
|
|
|
34,949
|
|
Valuation allowance
|
|
(1,394
|
)
|
|
—
|
|
Net deferred tax assets
|
|
42,117
|
|
|
34,949
|
|
Deferred tax liabilities:
|
|
|
|
|
Intangible asset amortization
|
|
(71,982
|
)
|
|
(76,682
|
)
|
Depreciation
|
|
—
|
|
|
—
|
|
Gross deferred tax liabilities
|
|
(71,982
|
)
|
|
(76,682
|
)
|
Net deferred tax liabilities
|
|
$
|
(29,865
|
)
|
|
$
|
(41,733
|
)
|
As of
April 30, 2016
, we had
$21
of unrecognized tax benefits, all of which, if recognized, would affect our effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
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|
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|
Balance at April 27, 2013
|
$
|
96
|
|
Additions for tax positions of the current period
|
84
|
|
Additions for tax positions of prior periods
|
—
|
|
Reductions due to settlements
|
—
|
|
Other reductions for tax positions of prior periods
|
—
|
|
Balance at May 3, 2014
|
$
|
180
|
|
Additions for tax positions of the current period
|
35
|
|
Additions for tax positions of prior periods
|
—
|
|
Reductions due to settlements
|
—
|
|
Other reductions for tax positions of prior periods
|
—
|
|
Balance at May 2, 2015
|
$
|
215
|
|
Additions for tax positions of the current period
|
21
|
|
Additions for tax positions of prior periods
|
—
|
|
Reductions due to settlements
|
—
|
|
Other reductions for tax positions of prior periods
|
(215
|
)
|
Balance at April 30, 2016
|
$
|
21
|
|
We do not believe that it is reasonably possible that these unrecognized tax benefits will decrease in the next twelve months.
Our policy is to recognize interest and penalties related to income tax matters in income tax expense. As of
April 30, 2016
and
May 2, 2015
, we had accrued
$137
and
$1
, respectively, for net interest and penalties. The change in the amount accrued for net interest and penalties includes
$136
in additions for net interest and penalties recognized in income tax expense in our Fiscal 2016 consolidated statement of operations.
In assessing the realizability of the deferred tax assets, management considered whether it is more likely than not that some or all of the deferred tax assets would be realized. In evaluating the Company’s ability to utilize its deferred tax assets, it considered
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
all available evidence, both positive and negative, in determining future taxable income on a jurisdiction by jurisdiction basis. The Company has recorded a valuation allowance of
$1,394
and
$0
at April 30, 2016 and May 2, 2015, respectively. The
$1,394
increase in the valuation allowance during Fiscal 2016 is due principally to costs incurred in connection with restructuring during Fiscal 2016 that are not more likely than not to be deductible for tax purposes.
At April 30, 2016, and based on its tax year ended January 2016, the Company had state net operating loss carryforwards (NOLs) of approximately
$17,467
that are available to offset taxable income in its respective taxing jurisdiction beginning in the current period and that expire beginning in 2030. The Company had net state tax credit carryforwards totaling
$172
, which expire beginning in 2021.
As of May 2, 2015, the Company has not provided for deferred taxes on the excess of financial reporting over the tax basis of investments in certain foreign subsidiaries because, as of Fiscal 2016, any such amounts are immaterial. If these earnings were repatriated in the future, additional income and withholding tax expense would be incurred.
We are subject to U.S. federal income tax as well as income tax in jurisdictions of each state having an income tax. The tax years that remain subject to examination are primarily from Fiscal 2013 and forward. Some earlier years remain open for a small minority of states. Pursuant to the Tax Matters Agreements referenced in
Note 10. Income Taxes
, we retain income tax liability for periods prior to the Spin-Off only for returns filed on a stand-alone basis.
Note 15.
Legal Proceedings
We are involved in a variety of claims, suits, investigations and proceedings that arise from time to time in the ordinary course of our business, including actions with respect to contracts, intellectual property, taxation, employment, benefits, personal injuries and other matters. The results of these proceedings in the ordinary course of business are not expected to have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
Note 16.
Commitments and Contingencies
We generally operate our stores pursuant to multi-year school management contracts under which a school designates us to operate the official school bookstore on campus and we provide the school with regular payments that represent a percentage of store sales and, in some cases, include a minimum fixed guaranteed payment. We account for these service agreements under lease accounting. We provide for minimum contract expense over the contract terms on a straight-line basis. The excess of such minimum contract expense over actual contract payments (net of school allowances) is reflected in other long-term liabilities and accrued liabilities in the consolidated balance sheets. The expense related to our college and university contracts, including rent expense, and other facility costs in the consolidated statements of operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016
|
|
Fiscal 2015
|
|
Fiscal 2014
|
Minimum contract expense
|
|
$
|
140,743
|
|
|
$
|
125,388
|
|
|
$
|
118,873
|
|
Percentage contract expense
|
|
101,552
|
|
|
106,011
|
|
|
99,025
|
|
|
|
$
|
242,295
|
|
|
$
|
231,399
|
|
|
$
|
217,898
|
|
Our contracts with colleges and universities are typically five years with renewal options, but can range from one to 15 years, and are typically cancelable by either party without penalty with 90 to120 days' notice. Annual projections below are based on current minimum guarantee amounts. In 60% of our contracts with colleges and universities, the minimum guaranteed amounts adjust annually to equal less than the prior year's commission earned.
As of
April 30, 2016
, future minimum annual obligations required under our contracts with colleges and universities and other facility costs are as follows:
|
|
|
|
|
Fiscal Year
|
|
2017
|
$
|
130,927
|
|
2018
|
120,071
|
|
2019
|
112,547
|
|
2020
|
102,325
|
|
2021
|
94,006
|
|
After 2021
|
188,989
|
|
|
$
|
748,865
|
|
BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
(Thousands of dollars, except share and per share data)
Purchase obligations, which includes information technology contracts and inventory purchase commitments, as of
April 30, 2016
are as follows:
|
|
|
|
|
Less Than 1 Year
|
$
|
2,867
|
|
1-3 Years
|
4,800
|
|
Total
|
$
|
7,667
|
|
Note 17.
Selected Quarterly Financial Information (Unaudited)
A summary of quarterly financial information for Fiscal 2016 and Fiscal 2015 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016 Quarterly Period Ended
|
|
August 1,
2015 (a)(b)
|
|
October 31,
2015
|
|
January 30,
2016
|
|
April 30,
2016
|
|
Fiscal Year
2016
|
Sales
|
|
$
|
238,983
|
|
|
$
|
755,864
|
|
|
$
|
518,423
|
|
|
$
|
294,759
|
|
|
$
|
1,808,029
|
|
Gross profit
|
|
$
|
51,544
|
|
|
$
|
175,121
|
|
|
$
|
120,640
|
|
|
$
|
106,044
|
|
|
$
|
453,349
|
|
Net (loss) income
|
|
$
|
(26,918
|
)
|
|
$
|
33,401
|
|
|
$
|
(3,603
|
)
|
|
$
|
(2,796
|
)
|
|
$
|
84
|
|
Basic (loss) earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(0.65
|
)
|
|
$
|
0.69
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
—
|
|
Diluted (loss) earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(0.65
|
)
|
|
$
|
0.69
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2015 Quarterly Period Ended
|
|
August 2,
2014
|
|
November 1,
2014
|
|
January 31,
2015
|
|
May 2,
2015
|
|
Fiscal Year
2015
|
Sales
|
|
$
|
225,741
|
|
|
$
|
751,702
|
|
|
$
|
521,554
|
|
|
$
|
274,001
|
|
|
$
|
1,772,998
|
|
Gross profit
|
|
$
|
47,310
|
|
|
$
|
173,511
|
|
|
$
|
121,622
|
|
|
$
|
101,130
|
|
|
$
|
443,573
|
|
Net (loss) income
|
|
$
|
(26,213
|
)
|
|
$
|
36,951
|
|
|
$
|
8,650
|
|
|
$
|
(256
|
)
|
|
$
|
19,132
|
|
Basic (loss) earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income (a)
|
|
$
|
(0.71
|
)
|
|
$
|
0.95
|
|
|
$
|
0.09
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.33
|
|
Diluted (loss) earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income (b)
|
|
$
|
(0.71
|
)
|
|
$
|
0.95
|
|
|
$
|
0.09
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.33
|
|
|
|
(a)
|
Basic earnings per share and weighted-average basic shares outstanding are based on the number of shares of Barnes & Noble, Inc. common stock outstanding on May 2, 2015, adjusted for an assumed distribution ratio of
0.632
shares of our Common Stock for every one share of Barnes & Noble, Inc. common stock held on the record date for the Spin-Off.
|
|
|
(b)
|
Diluted earnings per share and weighted-average diluted shares outstanding reflect potential common shares from Barnes & Noble, Inc. equity plans in which our employees participate based on the distribution ratio. While the actual future impact will depend on various factors, including employees who may change employment from one company to another, we believe the estimate yields a reasonable approximation of the future dilutive impact of our equity plans.
|
Schedule II—Valuation and Qualifying Accounts
Barnes & Noble Education, Inc.
Receivables Valuation and Qualifying Accounts
(In thousands)
For the 52 week period ended
April 30, 2016
, 52 week period ended
May 2, 2015
, and the 53 week period ended
May 3, 2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
beginning
of period
|
|
Charge
(recovery) to
costs and
expenses
|
|
Write-offs
|
|
Balance at
end
of period
|
Allowance for Doubtful Accounts
|
|
|
|
|
|
|
|
|
April 30, 2016
|
|
$
|
2,313
|
|
|
$
|
4,000
|
|
|
$
|
(3,993
|
)
|
|
$
|
2,320
|
|
May 2, 2015
|
|
$
|
2,233
|
|
|
$
|
3,544
|
|
|
$
|
(3,464
|
)
|
|
$
|
2,313
|
|
May 3, 2014
|
|
$
|
2,425
|
|
|
$
|
2,666
|
|
|
$
|
(2,858
|
)
|
|
$
|
2,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
beginning
of period
|
|
Addition
Charged to
Costs
|
|
Deductions
|
|
Balance at
end
of period
|
Sales Returns Reserves
|
|
|
|
|
|
|
|
|
April 30, 2016
|
|
$
|
162
|
|
|
$
|
47
|
|
|
$
|
—
|
|
|
$
|
209
|
|
May 2, 2015
|
|
$
|
153
|
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
162
|
|
May 3, 2014
|
|
$
|
123
|
|
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
153
|
|
All other schedules are omitted because the conditions requiring their filing do not exist, or because the required information is provided in the consolidated financial statements, including the notes thereto.