Barnes & Noble Education, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended April 28, 2018, consisting of 52 weeks. The request references “2017 Q4,” but the provided filing is the Fiscal 2018 annual report, including the fourth quarter ended April 28, 2018. Fiscal 2018 includes MBS Textbook Exchange for the full year and Student Brands from its August 3, 2017 acquisition date.
Business Context
BNED operates college and K-12 physical and virtual bookstores, textbook wholesale and inventory-management businesses, and digital student services. At year-end, BNC operated 768 physical bookstores, MBS operated 676 virtual bookstores, and DSS included Student Brands’ subscription-based writing and study services. The Company served more than 6 million students through its bookstore network and approximately 100,000 Student Brands subscribers.
In the fourth quarter of Fiscal 2018, the Company realigned its reporting structure into BNC, MBS and Digital Student Solutions, with unallocated costs reported as Corporate Services. Prior-period segment information was reclassified for comparability.
Financial Results and Key Metrics
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Total sales | $2.204 billion | $1.874 billion | 17.6% increase |
| Gross profit | $557.2 million | $459.1 million | 21.4% increase |
| Gross margin | 25.3% | 24.5% | 80 basis-point increase |
| Operating income/(loss) | $(262.7) million | $13.6 million | Decline |
| Net income/(loss) | $(252.6) million | $5.4 million | Decline |
| Diluted EPS | $(5.40) | $0.11 | Decline |
| Adjusted EBITDA | $126.8 million | $78.3 million | 61.9% increase |
| Adjusted Earnings | $56.9 million | $12.3 million | Increase |
| Capital expenditures | $42.8 million | $34.7 million | Increase |
Product sales and other increased 20.9% to $1.984 billion, primarily because of the full-year contribution from MBS and the partial-year contribution from Student Brands. Rental income decreased 5.7% to $219.1 million.
Operating results included a $313.1 million non-cash goodwill impairment charge related to the BNC reporting unit, $5.4 million of restructuring and other charges, $2.0 million of transaction costs and $3.3 million of non-cash MBS inventory valuation amortization. Excluding the principal non-GAAP items identified by management, operating income was $61.2 million, or 2.8% of sales, compared with $25.0 million, or 1.3% of sales, in Fiscal 2017.
Segment Performance
- BNC: Sales decreased 1.6% to $1.816 billion, and comparable-store sales declined 4.1%. BNC adjusted EBITDA decreased to $87.5 million from $107.8 million. Lower textbook prices, reduced enrollment at two-year community colleges, direct purchases from publishers and online providers, and weak retail conditions pressured results.
- MBS: Sales were $459.5 million, compared with $34.1 million in Fiscal 2017, which included only approximately two months of post-acquisition results. Adjusted EBITDA was $54.6 million versus a $(3.6) million loss in the comparable reported period.
- DSS: Sales were $15.8 million and adjusted EBITDA was $7.6 million, reflecting Student Brands results from the acquisition date.
- Corporate Services: Adjusted EBITDA was a $(22.2) million expense, compared with $(25.4) million in Fiscal 2017.
Cash Flow, Liquidity and Debt
| Metric | Fiscal 2018 | Fiscal 2017 |
|---|---|---|
| Cash flow from operations | $60.0 million | $68.0 million |
| Cash flow used in investing | $(100.0) million | $(224.4) million |
| Cash flow from financing | $35.2 million | $147.3 million |
| Cash and cash equivalents at year-end | $16.1 million | $19.0 million |
| Cash, cash equivalents and restricted cash at year-end | $16.9 million | $21.7 million |
| Total borrowings at year-end | $196.4 million | $159.6 million |
Year-end borrowings consisted of $96.4 million under the asset-backed revolving credit facility and $100.0 million under the FILO seasonal facility. The facilities are secured primarily by inventory and receivables. The Company reported compliance with its debt covenants at April 28, 2018 and stated that operating cash flow, available borrowings and vendor financing should provide adequate liquidity for the foreseeable future.
Material obligations included $806.4 million of school management contract and other lease obligations, $250.0 million of scheduled FILO facility commitments, and $7.3 million of purchase obligations. Other long-term liabilities included $40.4 million related to the LIFO reserve; management indicated that approximately $13.4 million became currently payable and that additional amounts could become payable within 12 months.
Material Changes, Outlook and Commentary
- BNED acquired Student Brands for cash consideration of approximately $62.0 million and continued integrating MBS, acquired in February 2017 for approximately $187.9 million.
- The Company expanded LoudCloud Courseware from 10 to 32 titles, with sales to approximately 21,000 students at 40 institutions.
- BNED entered into or expanded distribution and inclusive-access arrangements with major publishers, including Cengage, McGraw-Hill Education and Pearson.
- BNC signed 33 new-store contracts during Fiscal 2018 and MBS signed 21 new virtual-store contracts. Management expected to invest in its student-success platform and proprietary content during Fiscal 2019.
- The Company entered into a strategic partnership with The Princeton Review for test preparation and tutoring services and continued development of predictive analytics and degree-planning solutions.
- The Tax Cuts and Jobs Act produced a provisional $20.4 million tax benefit, principally from revaluing deferred tax balances after the federal corporate tax rate reduction. The accounting remained subject to measurement-period adjustments.
- The Company does not intend to pay cash dividends in the foreseeable future and retained earnings are expected to be reinvested in the business.
Risks, Contingencies and Unusual Items
- Course-material pricing and demand are under pressure from digital content, open educational resources, rentals, publisher-direct sales, online competitors and declining or changing enrollment patterns.
- BNC and MBS contracts are generally cancelable with notice, creating renewal, pricing and profitability risk. The Company also faces store closures and competitive bidding risk.
- MBS depends on textbook availability, inventory purchasing and resale values. Publisher consignment and rental programs may reduce used-textbook supply and pressure margins.
- The digital strategy and recent acquisitions may not achieve expected adoption, synergies or profitability, and integration could increase operating and internal-control risk.
- BNED faces substantial seasonality, with retail sales concentrated in the second and third fiscal quarters and MBS wholesale sales concentrated in the first three quarters.
- Goodwill remaining at April 28, 2018 was $49.3 million, all associated with MBS; BNC goodwill was fully impaired. Future declines in operating performance, market capitalization or forecasts could result in additional impairment charges.
- The Company identified cybersecurity, privacy, intellectual-property, counterfeit-content, supplier, regulatory, litigation and information-technology risks. Management did not expect pending legal proceedings to have a material adverse effect, but noted that outcomes are inherently uncertain.
- Management and Ernst & Young reported effective internal control over financial reporting, but Student Brands was excluded from the scope of the assessment because it was acquired during Fiscal 2018.
Investor Verification Checklist
- Reconcile reported sales growth with the full-year MBS contribution, partial-year Student Brands contribution and intercompany eliminations.
- Assess whether BNC comparable-store sales, textbook pricing and enrollment trends stabilize or continue to deteriorate.
- Evaluate the sustainability of $126.8 million of Adjusted EBITDA after excluding impairment, transaction, restructuring and acquisition-related items.
- Review liquidity, seasonal borrowing needs, FILO repayment requirements and compliance with excess-availability covenants.
- Monitor the $40.4 million LIFO-related tax liability and the amount that may become payable within the next 12 months.
- Verify integration progress and standalone performance of MBS, Student Brands, LoudCloud and other digital initiatives.
- Review the assumptions supporting the BNC goodwill impairment and the risk of further impairment or pressure on intangible assets.
- Confirm the eventual accounting impact of the Tax Cuts and Jobs Act and the adoption of the new revenue-recognition standard in Fiscal 2019.