Barnes & Noble Education, Inc.
Barnes & Noble Education, Inc. (Form: 10-Q, Received: 12/05/2017 16:52:59)
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________
FORM 10-Q
_______________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 28, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 1-37499
_______________________________________________
BARNES & NOBLE EDUCATION, INC.
(Exact Name of Registrant as Specified in Its Charter)
_______________________________________________
Delaware
 
46-0599018
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
120 Mountain View Blvd., Basking Ridge, NJ
 
07920
(Address of Principal Executive Offices)
 
(Zip Code)
(Registrant’s Telephone Number, Including Area Code): (908) 991-2665
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
_______________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
¨
Accelerated filer
 
x
 
 
 
 
 
 
Non-accelerated filer
 
¨   (Do not check if a smaller reporting company)
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
Emerging Growth Company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
As of November 30, 2017 , 46,914,248 shares of Common Stock, par value $0.01 per share, were outstanding.
 


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EXPLANATORY NOTE

Effective with the acquisition of MBS Textbook Exchange, LLC ("MBS") on February 27, 2017, we determined that we have two reportable segments: Barnes & Noble College Booksellers, LLC ("BNC") and MBS, whereas BNC was previously our only reportable segment prior to the acquisition. The condensed consolidated financial statements for the 13 and 26 weeks ended October 28, 2017 include the financial results of MBS and all material intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements for the 13 and 26 weeks ended October 29, 2016 exclude the financial results of MBS.
On August 3, 2017, we acquired Student Brands, LLC ("Student Brands"), a leading direct-to-student subscription-based writing services business. The condensed consolidated financial statements for the 13 and 26 weeks ended October 28, 2017 include the financial results of Student Brands in the BNC segment from the date of acquisition, August 3, 2017, and the condensed consolidated financial statements for the 13 and 26 weeks ended October 29, 2016 exclude the financial results of Student Brands.






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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Fiscal Quarter Ended October 28, 2017
Index to Form 10-Q
 
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

3

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PART I - FINANCIAL INFORMATION
 
Item 1:     Financial Statements

BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)  
 
13 weeks ended
 
26 weeks ended
 
October 28,
2017
 
October 29,
2016
 
October 28,
2017
 
October 29,
2016
Sales:
 
 
 
 
 
 
 
Product sales and other
$
817,825

 
$
697,927

 
$
1,152,327

 
$
915,663

Rental income
69,036

 
72,744

 
90,245

 
94,245

Total sales
886,861

 
770,671

 
1,242,572

 
1,009,908

Cost of sales:
 
 
 
 
 
 
 
Product and other cost of sales
628,839

 
554,498

 
906,580

 
732,492

Rental cost of sales
41,464

 
44,659

 
54,721

 
58,489

Total cost of sales
670,303

 
599,157

 
961,301

 
790,981

Gross profit
216,558

 
171,514

 
281,271

 
218,927

Selling and administrative expenses
115,148

 
101,123

 
214,558

 
185,060

Depreciation and amortization expense
16,704

 
12,987

 
31,721

 
25,908

Restructuring and other charges
193

 

 
5,429

 
1,790

Transaction costs
1,257

 
644

 
1,846

 
2,171

Operating income
83,256

 
56,760

 
27,717

 
3,998

Interest expense, net
1,836

 
630

 
4,874

 
1,296

Income before income taxes
81,420

 
56,130

 
22,843

 
2,702

Income tax expense
33,025

 
26,841

 
9,231

 
1,329

Net income
$
48,395

 
$
29,289

 
$
13,612

 
$
1,373

 
 
 
 
 
 
 
 
Earnings per share of common stock:
 
 
 
 
 
 
 
Basic
$
1.04

 
$
0.63

 
$
0.29

 
$
0.03

Diluted
$
1.03

 
$
0.63

 
$
0.29

 
$
0.03

Weighted average shares of common stock outstanding:
 
 
 
 
 
 
 
Basic
46,705

 
46,170

 
46,611

 
46,259

Diluted
47,006

 
46,593

 
47,144

 
46,652

See accompanying notes to condensed consolidated financial statements.


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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except per share data)  
 
October 28,
2017
 
October 29,
2016
 
April 29,
2017
 
(unaudited)
 
(unaudited)
 
(audited)
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
17,494

 
$
176,578

 
$
19,003

Receivables, net
153,646

 
93,250

 
86,040

Merchandise inventories, net
515,574

 
401,338

 
434,064

Textbook rental inventories
78,062

 
86,704

 
52,826

Prepaid expenses and other current assets
13,352

 
8,083

 
10,698

Total current assets
778,128

 
765,953

 
602,631

Property and equipment, net
115,318

 
108,499

 
116,613

Intangible assets, net
229,498

 
194,562

 
209,885

Goodwill
362,412

 
281,350

 
329,467

Other noncurrent assets
41,885

 
38,226

 
41,236

Total assets
$
1,527,241

 
$
1,388,590

 
$
1,299,832

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
458,833

 
$
439,746

 
$
192,742

Accrued liabilities
184,283

 
140,779

 
120,478

Short-term borrowings

 

 
100,000

Total current liabilities
643,116

 
580,525

 
413,220

Long-term deferred taxes, net
16,187

 
25,743

 
16,871

Other long-term liabilities
96,294

 
75,962

 
96,433

Long-term borrowings
41,800

 

 
59,600

Total liabilities
797,397

 
682,230

 
586,124

Commitments and contingencies

 

 

Stockholders' equity:
 
 
 
 
 
Preferred stock, $0.01 par value; authorized, 5,000 shares; issued and outstanding, none

 

 

Common stock, $0.01 par value; authorized, 200,000 shares; issued, 50,028, 48,972 and 49,372 shares, respectively; outstanding, 46,914, 46,276 and 46,517 shares, respectively
500

 
490

 
494

Additional paid-in capital
713,018

 
703,966

 
708,871

Retained earnings
45,975

 
28,375

 
32,363

Treasury stock, at cost
(29,649
)
 
(26,471
)
 
(28,020
)
Total stockholders' equity
729,844

 
706,360

 
713,708

Total liabilities and stockholders' equity
$
1,527,241

 
$
1,388,590

 
$
1,299,832

See accompanying notes to condensed consolidated financial statements.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
 
 
26 weeks ended
 
October 28,
2017
 
October 29,
2016
Cash flows from operating activities:
 
 
 
Net income
$
13,612

 
$
1,373

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization expense
31,721

 
25,908

Amortization of deferred financing costs
751

 
325

Deferred taxes
(684
)
 
(4,122
)
Stock-based compensation expense
4,153

 
4,458

Change in other long-term liabilities
(426
)
 
582

Changes in other operating assets and liabilities, net
150,493

 
150,805

Net cash flows provided by operating activities
199,620

 
179,329

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(22,422
)
 
(17,470
)
Acquisition of business, net of cash acquired
(58,259
)
 
(917
)
Net increase in other noncurrent assets
(1,018
)
 
(5,076
)
Net cash flows used in investing activities
(81,699
)
 
(23,463
)
Cash flows from financing activities:
 
 
 
Proceeds from borrowings under Credit Agreement
225,400

 
47,400

Repayments of borrowings under Credit Agreement
(343,200
)
 
(47,400
)
Purchase of treasury shares
(1,629
)
 
(7,856
)
Net cash flows used in financing activities
(119,429
)
 
(7,856
)
Net (decrease) increase in cash, cash equivalents and restricted cash
(1,508
)
 
148,010

Cash, cash equivalents and restricted cash at beginning of period
21,697

 
30,866

Cash, cash equivalents and restricted cash at end of period
$
20,189

 
$
178,876

Changes in other operating assets and liabilities, net:
 
 
 
Receivables, net
$
(67,256
)
 
$
(41,794
)
Merchandise inventories
(81,510
)
 
(88,591
)
Textbook rental inventories
(25,236
)
 
(38,944
)
Prepaid expenses and other current assets
(2,157
)
 
(1,532
)
Accounts payable and accrued liabilities
326,652

 
321,666

Changes in other operating assets and liabilities, net
$
150,493

 
$
150,805

See accompanying notes to condensed consolidated financial statements.


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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Equity
(In thousands)
(unaudited)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Paid-In
 
Retained
 
Treasury Stock
 
Total
 
 
Shares
 
Amount
 
Capital
 
Earnings
 
Shares
 
Amount
 
Equity
Balance at April 30, 2016
 
48,645

 
$
486

 
$
699,513

 
$
27,002

 
1,890

 
$
(18,615
)
 
$
708,386

Stock-based compensation expense
 
 
 
 
 
4,457

 
 
 
 
 
 
 
4,457

Vested equity awards
 
327

 
4

 
(4
)
 
 
 
 
 
 
 

Common stock repurchased
 
 
 
 
 
 
 
 
 
689

 
(6,718
)
 
(6,718
)
Shares repurchased for tax withholdings for vested stock awards
 
 
 
 
 
 
 
 
 
117

 
(1,138
)
 
(1,138
)
Net income
 
 
 
 
 

 
1,373

 
 
 
 
 
1,373

Balance at October 29, 2016
 
48,972

 
$
490

 
$
703,966

 
$
28,375

 
2,696

 
$
(26,471
)
 
$
706,360

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Paid-In
 
Retained
 
Treasury Stock
 
Total
 
 
Shares
 
Amount
 
Capital
 
Earnings
 
Shares
 
Amount
 
Equity
Balance at April 29, 2017
 
49,372

 
$
494

 
$
708,871

 
$
32,363

 
2,855

 
$
(28,020
)
 
$
713,708

Stock-based compensation expense
 
 
 
 
 
4,153

 
 
 
 
 
 
 
4,153

Vested equity awards
 
656

 
6

 
(6
)
 
 
 
 
 
 
 

Shares repurchased for tax withholdings for vested stock awards
 
 
 
 
 
 
 
 
 
259

 
(1,629
)
 
(1,629
)
Net income
 
 
 
 
 
 
 
13,612

 
 
 
 
 
13,612

Balance at October 28, 2017
 
50,028

 
$
500

 
$
713,018

 
$
45,975

 
3,114

 
$
(29,649
)
 
$
729,844

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

See accompanying notes to condensed consolidated financial statements.



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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 28, 2017 and October 29, 2016
(Thousands of dollars, except share and per share data)
(unaudited)
Unless the context otherwise indicates, references to “we,” “us,” “our”, and “the Company” refer to Barnes & Noble Education, Inc., a Delaware corporation. References to “Barnes & Noble College” or "BNC" refer to our college bookstore business operated through our subsidiary Barnes & Noble College Booksellers, LLC. References to “MBS” refer to our virtual bookstore and wholesale textbook distribution business operated through our subsidiary MBS Textbook Exchange, LLC, a Delaware corporation.
This Form 10-Q should be read in conjunction with our Audited Consolidated Financial Statements and accompanying Notes to consolidated financial statements in our Annual Report on Form 10-K for the year ended April 29, 2017, which includes consolidated financial statements for the Company for each of the three fiscal years ended April 29, 2017 April 30, 2016 and May 2, 2015 (Fiscal 2017 , Fiscal 2016 and Fiscal 2015 , respectively) and the unaudited condensed consolidated financial statements in our Form 10-Q for the 13 weeks ended July 29, 2017.
Note 1. Organization
Description of Business
Barnes & Noble Education, Inc. (“BNED”) is one of the largest contract operators of physical and virtual bookstores for higher education and K-12 institutions across the United States, one of the largest textbook wholesalers, and a leading provider of digital education services. Through its Barnes & Noble College (“BNC”) and MBS Textbook Exchange (“MBS”) subsidiaries, Barnes & Noble Education operates 1,483 physical and virtual bookstores and serves more than 6 million students, delivering essential educational content and tools within a dynamic retail environment. We have two reportable segments: BNC and MBS.
BNC operates 777 physical campus bookstores as of October 28, 2017, the majority of which also have school-branded e-commerce sites operated by BNC. 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 offerings, convenience food and beverages, and graduation products. BNC product offerings also include a suite of digital content, software, and services through our LoudCloud platform, such as predictive analytics, a variety of open educational resources ("OER") courseware, and competency-based learning solutions and a learning management system. Additionally, through Student Brands, LLC, a leading direct-to-student subscription-based writing services business, BNC offers services focused on study tools, writing help, and literary research, all centered around assisting students with the writing process.
Our MBS subsidiary operates two highly integrated businesses. The MBS Direct business is the largest contract operator of virtual bookstores for college and university campuses and private/parochial K-12 schools. MBS Direct operates 706 virtual bookstores as of October 28, 2017, offering new and used print and digital textbooks, which are available for sale or rent. Additionally, MBS Direct sells textbooks directly to students through textbooks.com SM , one of the largest e-commerce sites for new and used textbooks. MBS Wholesale is one of the largest textbook wholesalers in the country, providing a comprehensive selection of new and used textbooks at a low cost of supply to more than 3,700 physical bookstores (as of April 29, 2017), including BNC’s 777 campus bookstores.
Educational institutions increasingly are outsourcing bookstore operations, investing in data-driven analytical tools, and offering students more affordable options for textbooks and other learning tools. Given these continuing trends, we are well-positioned to capture new market share and partner with an increasing number of schools across the country. As demand for new, improved, and more affordable products and services increase in the rapidly changing education landscape, we are working to evolve our business model and enhance our solutions. We aim to be an even stronger partner for schools and meet customer needs by expanding our physical and virtual bookstore service capabilities, courseware offerings and digital platform services. We believe that our recent strategic actions, including the acquisition of LoudCloud, Promoversity, MBS, and Student Brands and development of courseware, have substantially enhanced our competitive position. We continue to aggressively innovate and collaborate with our partners to provide solutions that extend well beyond course materials sourcing and sales to include new digital services that support successful student outcomes.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 28, 2017 and October 29, 2016
(Thousands of dollars, except share and per share data)
(unaudited)


On August 3, 2017, we acquired Student Brands, LLC ("Student Brands"). Student Brands operates multiple direct-to-student businesses focused on Study Tools, Writing Help, and Literary Research, all centered around assisting students with the writing process. Student Brands has a substantial and growing community of online learners, with over 20 million unique monthly users across its digital properties, which include123HelpMe.com, Bartleby.com and StudyMode.com in the United States and TrabalhosFeitos.com, Etudier.com and Monografias.com in Brazil, France and Mexico, respectively. Student Brands utilizes deep data analytics and artificial intelligence to drive its content management system, the Content Brain. The Content Brain sifts through millions of pieces of content and provides the best answer for virtually any assignment a student is tackling. Student Brands generates revenue predominantly through its subscription-based services and digital advertisements.
Growth Drivers
The primary factors that we expect will enable us to grow our business are as follows:  
Increasing market share with new accounts.
Adapting our merchandising strategy and product and service offerings.
Providing a scalable and leading digital product and solution set.
Expanding strategic opportunities through acquisitions and partnerships.
For additional information related to the growth drivers for our business, see Part I - Item 1. Business - Overview - Growth Drivers in our Annual Report on Form 10-K for the year ended April 29, 2017.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
Our condensed consolidated financial statements reflect our condensed 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 unaudited condensed 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. These condensed consolidated financial statements are condensed and therefore do not include all of the information and footnotes required by GAAP.
The condensed consolidated financial statements are presented on a consolidated basis for the 13 and 26 weeks ended October 28, 2017 and include the financial results of MBS (which was acquired on February 27, 2017) and Student Brands (which was acquired on August 3, 2017). All material intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements for the 13 and 26 weeks ended October 29, 2016 exclude the financial results of MBS and Student Brands.
Our fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. Our retail business (BNC and MBS Direct) sales are generally highest in the second and third fiscal quarters, when college students generally purchase textbooks for the upcoming semesters, and lowest in the first and fourth fiscal quarters. Sales attributable to the MBS wholesale business are generally highest in our first, second and third quarter as it sells textbooks for retail distribution, which somewhat offsets the decreased first quarter sales attributable to our retail business. MBS has significantly lower operating profit or operating loss realized during the fourth quarter. Due to the seasonal nature of the business, the results of operations for the 13 and 26 weeks ended October 28, 2017 are not indicative of the results expected for the 52 weeks ending April 28, 2018 (Fiscal 2018).
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 condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 28, 2017 and October 29, 2016
(Thousands of dollars, except share and per share data)
(unaudited)


Merchandise Inventories
Merchandise inventories, which consist of finished goods, are stated at the lower of cost or market. Market value of our inventory, which is all purchased finished goods, is determined based on its estimated net realizable value, which is generally the selling price less normally predictable costs of disposal and transportation. Reserves for non-returnable inventory are based on our history of liquidating non-returnable inventory.
Cost is determined primarily by the retail inventory method for our BNC segment and last-in first out, or “LIFO”, method for our MBS segment. Our textbook inventories, for BNC and MBS, and trade book inventories are valued using the LIFO method and the related reserve was not material to the recorded amount of our inventories.
For our BNC segment, 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.
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.
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. Revenue from the sale of physical textbooks from our wholesale and virtual bookstores is recognized at the time of shipment. Additional revenue is recognized for shipping charges billed to customers.
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. We offer a buyout option to allow the purchase of a rented physical textbook 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.
Revenue from the rental of digital textbooks is recognized at the 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 primarily record digital textbook rental sales on a net basis in accordance with ASC 605-45-45, Reporting Revenue Gross as a Principal versus Net as an Agent .
We provide direct-to-student subscription-based writing services. Subscription revenue is deferred and recognized over the service period. The majority of subscriptions sold are one month in duration.
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.
Cost of Sales
Our cost of sales primarily include costs such as merchandise costs, textbook rental amortization, warehouse costs related to inventory management and order fulfillment, certain payroll costs, and management service agreement costs, including rent expense, related to our college and university contracts and 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 our digital platform and subscription-based services.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 28, 2017 and October 29, 2016
(Thousands of dollars, except share and per share data)
(unaudited)


Goodwill
The costs in excess of net assets of businesses acquired are carried as goodwill in the accompanying condensed consolidated balance sheets. As of October 28, 2017 , we had $362,412 of goodwill.
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 completed our annual goodwill impairment test as of the first day of the third quarter of Fiscal 2017. 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 1 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 Fiscal 2017 annual goodwill impairment test, the excess fair value over carrying value was approximately 5% . 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. For additional information related to key assumptions used in our testing, refer to Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates in our Annual Report on Form 10-K for the year ended April 29, 2017.
As disclosed in Note 3. Recent Accounting Pronouncements, we have elected to early adopt the guidance of ASU 2017-04 for our forthcoming Fiscal 2018 annual goodwill impairment test. Subsequent to the early adoption of ASU 2017-04, Step 2 of the goodwill impairment test has been eliminated and, if required, an impairment charge would be recognized for the amount by which the carrying amount of the reporting unit exceeds its fair value, up to the total amount of goodwill allocated to the reporting unit.
Income Taxes
As of October 28, 2017, other long-term liabilities includes $77,051 related to the long-term tax payable associated with the LIFO reserve. The LIFO reserve is impacted by changes in the consumer price index ("CPI") and inventory levels. Given recent trends relating to the pricing and rental of textbooks, management believes that a portion of the long-term tax payable associated with the LIFO reserve could be payable within the next twelve months. The LIFO reserve is dependent on the inventory levels at the end of our tax year (on or about January 31st) which is in the middle of our second largest selling cycle. We are unable to predict future trends for CPI and inventory levels, therefore it is difficult to project with reasonable certainty how much of this liability will become payable within the next twelve months.
Note 3. Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2017-04, Intangibles - Goodwill and Other (Topic 350) to simplify the test for Goodwill Impairment. The revised guidance eliminates the existing Step 2 of the goodwill impairment test which required an entity to compute the implied fair value of its goodwill at the testing date in order to measure the amount of the impairment charge when the fair value of the reporting unit failed Step 1 of the goodwill impairment test. Under the revised guidance, an entity would recognize an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value; however, the loss recognized would not exceed the total amount of goodwill allocated to the reporting unit. The guidance will be applied on a prospective basis. We are required to adopt this standard in the first quarter of Fiscal 2021 and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We have elected to early adopt this standard in the second quarter of Fiscal 2018.
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 condensed 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

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 28, 2017 and October 29, 2016
(Thousands of dollars, except share and per share data)
(unaudited)


current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. 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 new standard is required to be applied retrospectively to each prior reporting period (full retrospective method) or retrospectively with the cumulative effect of initially applying the standard recognized as an adjustment to opening retained earnings at the date of initial adoption (modified retrospective method).
We are in the process of analyzing the impacts of the guidance across all of our revenue streams. This includes reviewing current accounting policies and practices to identify potential differences that would result from applying the guidance. The majority of our revenue is generated from sales of finished products, which will continue to be recognized when control is transferred to the customer. Our assessment includes an evaluation of the impact that the guidance will have on our accounting for marketing revenue and other income streams. We are evaluating the guidance for our software license revenue, which is currently not material and is recognized over time, but may be recognized at a point in time under the new guidance. We are continuing to evaluate our revenue streams related to our digital product offerings and subscription-based services. We do not have loyalty programs or gift cards. While our assessment of the impacts of the guidance is still in process, we believe the adoption of the guidance is not expected to have a material impact on our condensed consolidated financial statements, other than the additional disclosure requirements. We plan to adopt the standard in the first quarter of Fiscal 2019 using the modified retrospective method.
Note 4. Acquisitions
Student Brands, LLC
On August 3, 2017, we acquired 100% of the equity interests of Student Brands. Student Brands operates multiple direct-to-student businesses focused on Study Tools, Writing Help, and Literary Research, all centered around assisting students with the writing process.
We completed the purchase for cash consideration of $61,997 , including cash acquired of $4,626 , and the transaction was funded from cash on-hand and availability under our existing Credit Agreement. We are still in the process of valuing the assets acquired and liabilities assumed; thus, allocation of the acquisition consideration is subject to change and considered preliminary. The preliminary purchase price was allocated primarily as follows: $28,300 intangible assets, $1,593 acquired working capital and $31,782 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. Identified intangible assets include the following:
Type of Intangible
 
Amount
 
Estimated Useful Life
Content
 
$
14,500

 
5
Technology
 
8,000

 
5
Non-Compete Agreements
 
4,000

 
3
Subscriber List
 
1,800

 
2
Total Intangibles:
 
$
28,300

 
 
MBS Textbook Exchange, LLC
On February 27, 2017, we completed the purchase of all issued and outstanding units of MBS Textbook Exchange, LLC. MBS operates two highly integrated businesses. The MBS Direct business is the largest contract operator of virtual bookstores, operating 706 virtual bookstores for college and university campuses and private/parochial K-12 schools as of October 28, 2017. MBS Wholesale is one of the largest textbook wholesalers in the country, providing a comprehensive selection of new and used textbooks at a low cost of supply to more than 3,700 physical bookstores (as of April 29, 2017), including BNC’s 777 campus bookstores. Refer to Note 1. Organization of this Form 10-Q for additional information about MBS.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 28, 2017 and October 29, 2016
(Thousands of dollars, except share and per share data)
(unaudited)


We acquired 100% of the equity interests of MBS for cash consideration of $187,862 , including cash and restricted cash acquired of $1,171 , and the acquisition was financed with cash from operations as well as proceeds from our existing credit facility. During the 13 weeks ended October 28, 2017, we finalized the valuation and recorded adjustments to the acquired liabilities which resulted in an increase to goodwill of $1,163 . These adjustments were related to a final reconciliation of the pre-acquisition tax liability due to the seller of $888 under the purchase agreement, as well as a net $275 increase in other long-term liabilities.
The following is a summary of consideration paid for the acquisition:
Cash paid to Seller or escrow
 
$
165,499

Consideration to Seller for pre-closing costs
 
4,657

Cash paid for Seller closing costs
 
4,044

Contract purchase price
 
$
174,200

Consideration for payment to settle Seller's outstanding short-term borrowings
 
24,437

Consideration for reimbursement of pre-acquisition tax liability to Seller
 
15,556

Less: Consideration to Seller for pre-closing costs
 
(4,657
)
Less: Consideration for settlement of pre-existing payable to Seller
 
(21,674
)
Total value of consideration transferred
 
$
187,862

 
 
 

The following is a summary of the fair values of the net assets acquired:
Total consideration transferred
 
$
187,862

Cash and cash equivalents
 
$
472

Accounts receivable, net
 
28,177

Merchandise inventory
 
128,431

Property and equipment
 
12,403

Intangible assets
 
21,576

Prepaid and other assets
 
4,748

Total assets
 
$
195,807

Accounts payable
 
$
35,383

Accrued expenses
 
8,799

Other long-term liabilities
 
13,044

Total liabilities
 
$
57,226

Net assets acquired
 
$
138,581

Goodwill
 
$
49,281

Identified intangible assets include the following:
Type of Intangible
 
Amount
 
Estimated Useful Life
Favorable Lease
 
$
1,076

 
6.5
Trade Name
 
3,500

 
10
Technology
 
1,500

 
3
Book Store Relationship
 
13,000

 
13
Direct Customer Relationship
 
2,000

 
15
Non-Compete Agreements
 
500

 
3
Total Intangibles:
 
$
21,576

 
 

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 28, 2017 and October 29, 2016
(Thousands of dollars, except share and per share data)
(unaudited)


Note 5. Segment Reporting
We identified our segments 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. Effective with the acquisition of MBS on February 27, 2017, we have determined that we operate two reportable segments: BNC and MBS. Prior to the acquisition of MBS, BNC was our only reportable segment. Our international operations are not material and the majority of the revenue and total assets are within the United States. For a description of the BNC and MBS businesses, refer to Note 1. Organization of this Form 10-Q.
The condensed consolidated financial statements for the 13 and 26 weeks ended October 28, 2017 include the financial results of MBS and all material intercompany accounts and transactions have been eliminated in consolidation. The eliminations are primarily related to the following intercompany activities:
BNC purchases new and used textbooks from MBS for distribution at BNC's physical college bookstores. We eliminate the net sales from MBS and the intercompany profit in ending inventory, and
MBS pays commissions to BNC for certain textbooks its sells to MBS that cannot be returned to suppliers or used in their stores. The commission is based on the volume of textbooks sold to MBS and with respect to the textbook requirements of certain distance learning programs that MBS fulfills on BNC's behalf.
Intercompany Eliminations
Sales eliminations represent the elimination of MBS sales to BNC and the elimination of BNC commissions earned from MBS. Cost of sales eliminations represent (i) the recognition of intercompany profit for BNC inventory that was purchased from MBS in a prior period that was subsequently sold to external customers during the current period, net of (ii) the elimination of intercompany profit for MBS inventory purchases by BNC that remain in ending inventory at the end of the current period. Gross margin eliminations reflect the net impact of the sales eliminations and cost of sales eliminations.


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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 28, 2017 and October 29, 2016
(Thousands of dollars, except share and per share data)
(unaudited)


Summarized financial information for our reportable segments is reported below:
 
13 weeks ended
 
26 weeks ended
 
October 28,
2017
 
October 29,
2016
 
October 28, 2017
 
October 29, 2016
Sales:
 
 
 
 
 
 
 
BNC
$
761,787

 
$
770,671

 
$
1,011,764

 
$
1,009,908

MBS
134,851

 

 
274,652

 

Elimination
(9,777
)
 

 
(43,844
)
 

Total Sales
$
886,861

 
$
770,671

 
$
1,242,572

 
$
1,009,908

 
 
 
 
 
 
 
 
Gross Profit
 
 
 
 
 
 
 
BNC
$
171,725

 
$
171,514

 
$
220,462

 
$
218,927

MBS
33,175

 

 
60,764

 

Elimination
11,658

 

 
45

 

Total Gross Profit
$
216,558

 
$
171,514

 
$
281,271

 
$
218,927

 
 
 
 
 
 
 
 
Depreciation and Amortization
 
 
 
 
 
 
 
BNC
$
15,086

 
$
12,987

 
$
28,468

 
$
25,908

MBS
1,618

 

 
3,253

 

Total Depreciation and Amortization
$
16,704

 
$
12,987

 
$
31,721

 
$
25,908

 
 
 
 
 
 
 
 
Operating Income
 
 
 
 
 
 
 
BNC (a),(b)
$
55,062

 
$
56,760

 
$
(1,050
)
 
$
3,998

MBS
16,536

 

 
28,722

 

Elimination
11,658

 

 
45

 

Total Operating Income
$
83,256

 
$
56,760

 
$
27,717

 
$
3,998

 
 
 
 
 
 
 
 
The following is a reconciliation of segment Operating Income to consolidated Income Before Income Taxes:
 
 
 
 
 
 
 
Total Operating Income
$
83,256

 
$
56,760

 
$
27,717

 
$
3,998

Interest Expense, net
(1,836
)
 
(630
)
 
(4,874
)
 
(1,296
)
Total Income Before Income Taxes
$
81,420

 
$
56,130

 
$
22,843

 
$
2,702

 
 
 
 
 
 
 
 
(a) During the 26 weeks ended October 28, 2017, we recognized expenses totaling approximately $5,361 related to the resignation of Mr. Max J. Roberts as Chief Executive Officer of the Company and the appointment of Mr. Michael P. Huseby to the position of Chief Executive Officer and Chairman of the Board, both effective as of September 19, 2017. For additional information, refer to Note 9. Supplemental Information - Restructuring and Other Charges of this Form 10-Q .
(b) On August 3, 2017, we acquired Student Brands, LLC, a leading direct-to-student subscription-based writing services business. The condensed consolidated financial statements for the 13 and 26 weeks ended October 28, 2017 include the financial results of Student Brands in the BNC segment from the date of acquisition, August 3, 2017, and the condensed consolidated financial statements for the 13 and 26 weeks ended October 29, 2016 exclude the financial results of Student Brands.
Note 6. Equity and Earnings Per Share
Equity
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 may include 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.

15

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 28, 2017 and October 29, 2016
(Thousands of dollars, except share and per share data)
(unaudited)


During the 26 weeks ended October 28, 2017, we did not repurchase shares of our common stock. As of October 28, 2017 , approximately $26,669 remains available under the stock repurchase program.
Earnings Per Share
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 13 and 26 weeks ended October 28, 2017, average shares of 918 and 506 were excluded from the diluted earnings per share calculation as their inclusion would have been antidilutive, respectively. The following is a reconciliation of the basic and diluted loss per share calculation:
 
13 weeks ended
 
26 weeks ended
 
October 28,
2017
 
October 29,
2016
 
October 28,
2017
 
October 29,
2016
Numerator for basic and diluted earnings per share:
 
 
 
 
 
 
 
Net income
$
48,395

 
$
29,289

 
$
13,612

 
$
1,373

Less allocation of earnings to participating securities
(16
)
 
(19
)
 
(4
)
 
(1
)
Net income available to common shareholders
$
48,379

 
$
29,270

 
$
13,608

 
$
1,372

 
 
 
 
 
 
 
 
Numerator for diluted earnings per share:
 
 
 
 
 
 
 
Net income available to common shareholders
$
48,379

 
$
29,270

 
$
13,608

 
$
1,372

Allocation of earnings to participating securities
16

 
19

 
4

 
1

Less diluted allocation of earnings to participating securities
(16
)
 
(19
)
 
(4
)
 
(1
)
Net income available to common shareholders
$
48,379

 
$
29,270

 
$
13,608

 
$
1,372

 
 
 
 
 
 
 
 
Denominator for basic earnings per share:
 
 
 
 
 
 
 
Basic weighted average shares of Common Stock
46,705

 
46,170

 
46,611

 
46,259

 
 
 
 
 
 
 
 
Denominator for diluted earnings per share:
 
 
 
 
 
 
 
Basic weighted average shares of Common Stock
46,705

 
46,170

 
46,611

 
46,259

Average dilutive restricted stock units
162

 
364

 
389

 
339

Average dilutive performance shares
113

 
35

 
127

 
24

Average dilutive restricted shares
7

 
24

 
8

 
30

Average dilutive performance share units
19

 

 
9

 

Average dilutive options

 

 

 

Diluted weighted average shares of Common Stock
47,006

 
46,593

 
47,144

 
46,652

 
 
 
 
 
 
 
 
Earnings per share of Common Stock:
 
 
 
 
 
 
 
Basic
$
1.04

 
$
0.63

 
$
0.29

 
$
0.03

Diluted
$
1.03

 
$
0.63

 
$
0.29

 
$
0.03

 

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 28, 2017 and October 29, 2016
(Thousands of dollars, except share and per share data)
(unaudited)


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
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. The fair value of short-term and long-term debt approximates its carrying value.
Note 8. Credit Facility
On August 3, 2015, we and certain of our subsidiaries, entered into a credit agreement (the “Credit Agreement”) under which the lenders committed to provide a five-year asset-backed revolving credit facility in an aggregate committed principal amount of $400,000 (the “Credit Facility”). The Company has the option to request an increase in commitments under the Credit Facility of up to $100,000 subject to certain restrictions.
On February 27, 2017, in connection with the acquisition of MBS, we amended the Credit Agreement with our current lenders to add a new $100,000 incremental first in, last out seasonal loan facility (the “FILO Facility”) increasing the maximum availability under the Credit Agreement to $500,000 .
For additional information including interest terms and covenant requirements related to the Credit Facility, refer to Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity in our Annual Report on Form 10-K for the year ended April 29, 2017.
During the 26 weeks ended October 28, 2017 , we borrowed $225,400 and repaid $343,200 under the Credit Agreement, for a net total of $41,800 of outstanding borrowings as of October 28, 2017 , comprised of outstanding borrowings of $41,800 and $0 under the Credit Facility and FILO Facility, respectively. As of October 28, 2017 , we have issued $4,759 in letters of credit under the Credit Facility.
Note 9. Supplementary Information
Restructuring and other charges
Restructuring
In Fiscal 2016, we implemented a plan to restructure our digital education operations which was completed in the first quarter of Fiscal 2017, and was primarily comprised of costs related to employee matters. We recorded restructuring costs of $68 and $1,790 during the 26 weeks ended October 28, 2017 and October 29, 2016, respectively.
Other Charges
On July 19, 2017, Mr. Max J. Roberts resigned as Chief Executive Officer of the Company and Mr. Michael P. Huseby was appointed to the position of Chief Executive Officer and Chairman of the Board, both effective as of September 19, 2017. Pursuant to the terms of the Retirement Letter Agreement, Mr. Roberts received an aggregate payment of approximately $4,424 , comprised of salary, bonus and benefits. In addition, the Company paid Mr. Roberts and Mr. Huseby a one-time cash transition payment of approximately $562 and $250 , respectively, at the time of the transition. During the 26 weeks ended October 28, 2017, we recognized expenses totaling approximately $5,361 , which is comprised of the severance and transition payments. For additional information, see the Form 8-K dated July 19, 2017, filed with the SEC on July 20, 2017.

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Table of Contents

BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 28, 2017 and October 29, 2016
(Thousands of dollars, except share and per share data)
(unaudited)


Note 10. Barnes & Noble, Inc. Transactions
Our History with Barnes & Noble, Inc.
On August 2, 2015, we completed the legal separation from Barnes & Noble, Inc. ("Spin-Off") at which time we began to operate as an independent publicly-traded company. In connection with the separation from Barnes & Noble, we entered into a Separation and Distribution Agreement with Barnes & Noble which governs the relationship between the parties after the separation and allocates 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. For information about our history with Barnes & Noble, Inc., see Part II - Item 8. Financial Statements and Supplementary Data - Note 10. Barnes & Noble, Inc. Transactions in our Annual Report on Form 10-K for the year ended April 29, 2017.
Summary of Transactions with Barnes & Noble, Inc.
During the 13 weeks ended October 28, 2017 and October 29, 2016, we were billed $8,195 and $7,928 , respectively, for purchases of inventory and direct costs incurred under the agreements discussed above which are included as cost of sales, and selling and administrative expenses in the condensed consolidated statement of operations.
During the 26 weeks ended October 28, 2017 and October 29, 2016, we were billed $15,023 and $16,141 , respectively, for purchases of inventory and direct costs incurred under the agreements discussed above which are included as cost of sales, and selling and administrative expenses in the condensed consolidated statement of operations.
As of October 28, 2017 and October 29, 2016 , amounts due to Barnes & Noble, Inc. for book purchases and direct costs incurred under the agreements discussed above of $9,619 and $8,951 were included in accounts payable in the condensed consolidated balance sheets, respectively.
Note 11. Related Party Transactions
Prior to the acquisition of MBS on February 27, 2017, MBS was considered a related-party as it was majority-owned by Leonard Riggio, who is a principal owner holding a substantial percentage of shares of our common stock, and other members of the Riggio family.
Prior to the acquisition (as discussed in Note 4. Acquisitions of this Form 10Q), we had a long-term supply agreement (“Supply Agreement”) with MBS, under which and subject to availability and competitive terms and conditions, we purchased 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. During the 13 and 26 weeks ended October 29, 2016, total net purchases from MBS were $15,034 and $70,039 , respectively. Additionally, the Supply Agreement provided that we may sell to MBS certain textbooks that we cannot return to suppliers or use in our stores. MBS paid 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. During the 13 and 26 weeks ended October 29, 2016, MBS paid us $2,055 and $3,925 , respectively, related to these commissions. In addition, the Supply Agreement contained restrictive covenants that limited our ability to become a used textbook wholesaler and that placed certain limitations on MBS’s business activities. We also previously entered into an agreement with MBS pursuant to which MBS purchased books, which have no resale value for a flat rate per box, from us. During the 13 and 26 weeks ended October 29, 2016, total sales to MBS under this program were $111 and $165 , respectively. Total outstanding amounts payable to MBS for all arrangements net of any amounts due was $85,054 as of October 29, 2016.
Subsequent to the acquisition, the condensed consolidated financial statements include the accounts of MBS and all material intercompany accounts and transactions have been eliminated in consolidation.
MBS leases its main warehouse and distribution facility located in Columbia, Missouri from MBS Realty Partners L.P. which is majority-owned by Leonard Riggio, with the remaining ownership by other sellers of MBS. The lease was originally entered into in 1991 and included a renewal option which extended the lease through September 1, 2023. Based upon a valuation performed as of the acquisition date, the lease was determined to be favorable from a lessee perspective with below market rent. For additional information, see Note 4. Acquisitions of this Form 10Q. Rent payments to MBS Realty Partners L.P. were approximately $345 and $690 during the 13 and 26 weeks ended October 28, 2017, respectively.

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Table of Contents

BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 28, 2017 and October 29, 2016
(Thousands of dollars, except share and per share data)
(unaudited)


Note 12. Employee Benefit Plans
BNC
BNC has a defined contribution plan for its employees ("Savings Plan"). BNC is responsible for employer contributions to the Savings Plan and to fund the contributions directly. Total contributions charged to employee benefit expenses for this plan was $998 and $991 during the 13 weeks ended October 28, 2017 and October 29, 2016 , respectively, and $2,209 and $2,240 during the 26 weeks ended October 28, 2017 and October 29, 2016, respectively.
MBS
MBS maintains a defined contribution and profit sharing plan ("Profit Sharing Plan") covering substantially all full-time employees of MBS. MBS transfers employee contributions to the account balances of their employees and is responsible to fund the employer contributions directly. Total employee benefit expenses for the Profit Sharing Plan was $767 and $1,555 during the 13 and 26 weeks ended October 28, 2017, respectively.
Note 13. Stock-Based Compensation
We recognize compensation expense for awards ratably over the requisite service period of the award, which is generally three years. 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.
During the 26 weeks ended October 28, 2017, we granted the following awards:
537,756 performance share units ("PSU") awards to employees that will only vest based upon the achievement of pre-established performance goals related to Adjusted EBITDA and new business achieved measured over a period of time. The PSU awards will vest based on company performance during Fiscal 2018 - Fiscal 2019 with one additional year of time-based vesting. The number of PSU awards that will vest range from 0%-150% of the target award based on actual performance.
1,562,110 RSU awards were granted to employees with a three year vesting period in accordance with the Equity Incentive Plan;
78,816 RSU awards and 19,704 RS awards were granted to the current Board of Directors ("BOD") members for annual compensation with a one year vesting period in accordance with the Equity Incentive Plan.
We recognized stock-based compensation expense for equity-based awards in selling and administrative expenses as follows:
 
13 weeks ended
 
26 weeks ended
 
October 28,
2017
 
October 29,
2016
 
October 28,
2017
 
October 29,
2016
Restricted stock expense
$
30

 
$
70

 
$
60

 
$
220

Restricted stock units expense (a)
2,140

 
2,282

 
4,040

 
3,878

Performance shares expense  (b)
(265
)
 
216

 
(333
)
 
360

Performance share units expense (b)
268

 

 
386

 

Stock-based compensation expense
$
2,173

 
$
2,568

 
$
4,153

 
$
4,458

(a) The stock-based compensation expense for the restricted stock units reflect the forfeiture adjustment for unvested shares related to the CEO transition. See Note 9. Supplementary Information - Restructuring and Other Charges of this Form 10-Q for additional information.
(b) The performance shares and performance share units expenses reflect a cumulative adjustment to reflect changes to the expected level of achievement of the respective grants.
Total unrecognized compensation cost related to unvested awards as of October 28, 2017 was $20,137 and is expected to be recognized over a weighted-average period of 2.3 years.

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BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the 13 and 26 weeks ended October 28, 2017 and October 29, 2016
(Thousands of dollars, except share and per share data)
(unaudited)


Note 14. Income Taxes
We recorded an income tax expense of $33,025 on pre-tax income of $81,420 during the 13 weeks ended October 28, 2017 , which represented an effective income tax rate of 40.6% and an income tax expense of $26,841 on pre-tax income of $56,130 during the 13 weeks ended October 29, 2016 , which represented an effective income tax rate of 47.8% .
We recorded an income tax expense of $9,231 on pre-tax income of $22,843 during the 26 weeks ended October 28, 2017, which represented an effective income tax rate of 40.4% and an income tax expense of $1,329 on pre-tax income of $2,702 during the 26 weeks ended October 29, 2016, which represented an effective income tax rate of 49.2%  
Management expects nondeductible compensation expense for the current fiscal year to be significantly lower compared to the prior fiscal year as components of our executive compensation program now qualify as deductible under Section 162(m) of the Internal Revenue Code. In addition, our income tax provision for the preceding two fiscal years reflected certain non-recurring tax benefits arising from the Spin-Off. Management does not expect any similar non-recurring tax benefits associated with the Spin-Off to impact our effective tax rate either in the current fiscal year or in future fiscal years.
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 condensed consolidated financial position, results of operations, or cash flows.

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Item 2:     Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context otherwise indicates, references to “we,” “us,” “our” and “the Company” refer to Barnes & Noble Education, Inc., a Delaware corporation. References to “Barnes & Noble College” or "BNC" refer to our college bookstore business operated through our subsidiary Barnes & Noble College Booksellers, LLC. References to “MBS” refer to our virtual bookstore and wholesale textbook distribution business operated through our subsidiary MBS Textbook Exchange, LLC, a Delaware corporation.
Overview
Description of business
Barnes & Noble Education, Inc. (“BNED”) is one of the largest contract operators of physical and virtual bookstores for higher education and K-12 institutions across the United States, one of the largest textbook wholesalers, and a leading provider of digital education services. Through its Barnes & Noble College (“BNC”) and MBS Textbook Exchange (“MBS”) subsidiaries, Barnes & Noble Education operates 1,483 physical and virtual bookstores and serves more than 6 million students, delivering essential educational content and tools within a dynamic retail environment. Through LoudCloud, its digital education platform, Barnes & Noble Education offers a suite of digital software, content and services that include predictive analytics, open educational resources ("OER") courseware, competency-based solutions, and a learning management system. Additionally, through Student Brands, LLC, a leading direct-to-student subscription-based writing services business, BNC offers services focused on study tools, writing help, and literary research, all centered around assisting students with the writing process.
We believe our product offerings and services for students, faculty and administrators enable a more personalized learning experience, which improves student success rates and retention. We strive to be the first stop for students, educators and administrators by offering the most comprehensive resources available with our flexible physical and/or virtual bookstore options. The strengths of our business include our large footprint with well-recognized brand; our ability to meet students’ affordability needs; our comprehensive suite of course materials; our well-established, deep relationships with partners; direct access to students and faculty; integrated systems with our customers; and stable, long-term contracts. We expect to continue to grow our business by increasing market share with new accounts, introducing scalable and advanced digital solutions and expanding our strategic opportunities through acquisitions and partnerships.
Educational institutions increasingly are outsourcing bookstore operations, investing in data-driven analytical tools, and offering students more affordable options for textbooks and other learning tools. Given these continuing trends, we are well-positioned to capture new market share and partner with an increasing number of schools across the country. As demand for new, improved, and more affordable products and services increase in the rapidly changing education landscape, we are working to evolve our business model and enhance our solutions. We aim to be an even stronger partner for schools and meet customer needs by expanding our physical and virtual bookstore service capabilities, courseware offerings and digital platform services. We believe that our strategic actions, including the acquisition of LoudCloud, Promoversity, MBS, and Student Brands (discussed below) and development of courseware, have substantially enhanced our competitive position. We continue to aggressively innovate and collaborate with our partners to provide solutions that extend well beyond course materials sourcing and sales to include new digital services that support successful student outcomes.
For additional information related to our business, see Part I - Item 1. Business in our Annual Report on Form 10-K for the year ended April 29, 2017.
Acquisition of Student Brands, LLC
On August 3, 2017, we acquired Student Brands. Student Brands is an education technology company that operates multiple direct-to-student businesses focused on Study Tools, Writing Help, and Literary Research, all centered around assisting students with the writing process. Student Brands generates revenue predominantly through its subscription-based services and digital advertisements. Student Brands has over 20 million unique monthly users across its digital properties, which include123HelpMe.com, Bartleby.com and StudyMode.com in the United States and TrabalhosFeitos.com, Etudier.com and Monografias.com in Brazil, France and Mexico, respectively.
Segments
We have two reportable segments: BNC and MBS.
BNC operates 777 physical campus bookstores as of October 28, 2017, the majority of which also have school-branded e-commerce sites operated by BNC, and BNC also includes our digital education operations and subscription-based writing services business. 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 offerings, convenience food and beverages, and graduation products. BNC product offerings also include a suite of digital content, software, and services through our LoudCloud platform,

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such as predictive analytics, a variety of open educational resources ("OER") courseware, and competency-based learning solutions and a learning management system. Additionally, through Student Brands, BNC offers services focused on study tools, writing help, and literary research, all centered around assisting students with the writing process. During the 26 weeks ended October 28, 2017, BNC opened 24 stores, with estimated annual first year sales of $49 million.
Our MBS subsidiary operates two highly integrated businesses. The MBS Direct business is the largest contract operator of virtual bookstores for college and university campuses and private/parochial K-12 schools. MBS Direct operates 706 virtual bookstores as of October 28, 2017, offering new and used print and digital textbooks, which are available for sale or rent. Additionally, MBS Direct sells textbooks directly to students through textbooks.com SM , one of the largest e-commerce sites for new and used textbooks. MBS Wholesale is one of the largest textbook wholesalers in the country, providing a comprehensive selection of new and used textbooks at a low cost of supply to more than 3,700 physical bookstores (as of April 29, 2017), including BNC’s 777 campus bookstores. During the 26 weeks ended October 28, 2017, MBS Direct opened 14 stores, with estimated annual first year sales of $3.8 million.
For additional information related to product and platform offerings for BNC and MBS, see Part I - Item 1. Business in our Annual Report on Form 10-K for the year ended April 29, 2017.
Trends and Other Factors Affecting Our Business
Current trends and other factors affecting our business include:
Overall Economic Environment, College Enrollment and Consumer Spending Patterns: Our business is affected by funding levels at colleges and universities, by changes in enrollments at colleges and universities, and spending on textbooks and general merchandise. The growth of our business depends on our ability to attract new students and to increase the level of engagement by existing students. For the 26 weeks ended October 28, 2017, our comparable store sales were impacted by lower average selling prices of course materials driven by lower publisher prices resulting from a shift to lower cost options and more affordable solutions, including digital. Additionally, comparable store sales declined for textbooks due to lower community college enrollment, increased consumer purchases directly from publishers and other online providers, and general weakness in the retail environment.
Supply Chain and Inventory: Since the demand for used and new textbooks has historically been greater than the available supply, our financial results are highly dependent upon MBS Wholesale’s ability to build its textbook inventory from suppliers in advance of the selling season. Some textbook publishers have begun to supply textbooks on consignment or rental programs which could impact used textbook supplies in the future.
Demand for Digital Offerings: Over the longer-term, we anticipate significant new opportunities for our digital product offerings. Through our LoudCloud platform, we address the growing demand for alternative forms of educational materials and learning tools.
New and Existing Bookstore Contracts: We expect awards of new accounts resulting in new physical and virtual store openings will continue to be an important driver of future growth in our business. We expect to continue to successfully renew our current contracts on favorable terms.
Campus Bookstore Outsourcing: We continue to see increasing trends towards outsourcing in the campus bookstore market, including virtual bookstores and online marketplace websites. We also continue to see a variety of business models being pursued for the provision of textbooks, course materials and general merchandise. Contract costs, which are included in cost of sales, and primarily consist of the payments we make to the colleges and universities to operate their official bookstores (management service agreement costs), including rent expense, have generally increased as a percentage of sales as a result of increased competition for renewals and new store contracts.
Course Materials Market: In addition to the competition in the services we provide to our customers, our textbook business faces significant price competition. Many students purchase from multiple textbook providers, are highly price sensitive and can easily shift spending from one provider or format to another. Some of our competitors have adopted, and may continue to adopt, aggressive pricing policies and devote substantial resources to marketing, website and systems development. As we expanded our textbook rental offerings, students have been shifting away from higher priced textbook purchases to lower priced rental options, which has resulted in lower textbook sales and increasing rental income.
Retail Environment: BNC general merchandise sales, which are subject to short-term fluctuations driven by the broader retail environment, continue to increase over the long term as our product assortments continue to emphasize and reflect the changing consumer trends, and we evolve our presentation concepts and merchandising of products in stores and online. During the 26 weeks ended October 28, 2017, our comparable store sales trends improved for general merchandise.
For additional information related to factors affecting our business, see Part I - Item 1. Business - Trends and Other Factors Affecting Our Business in our Annual Report on Form 10-K for the year ended April 29, 2017.

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Elements of Results of Operations
Our condensed consolidated financial statements reflect our condensed consolidated financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”). On February 27, 2017, we acquired MBS Textbook Exchange, LLC and on August 3, 2017 we acquired Student Brands, LLC. The results of operations for the 13 and 26 weeks ended October 28, 2017 include the financial results of both MBS and Student Brands and all material intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the 13 and 26 weeks ended October 29, 2016 exclude the financial results of MBS and Student Brands.
Our sales are primarily derived from the sale of course materials (which include new and used textbooks and digital textbooks). Our rental income is primarily derived from the rental of physical and digital textbooks. At college and university bookstores which we operate, we sell emblematic apparel and gifts, trade books, computer products, school and dorm supplies, convenience and café items and graduation products. We also derive revenue from sales related to inventory management, hardware and point-of-sale software and direct-to-student subscription-based writing services.
Our cost of sales primarily include costs such as merchandise costs, textbook rental amortization, payroll costs, as well as warehouse costs related to inventory management and order fulfillment, and management service agreement costs, including rent expense, related to our college and university contracts and other facility related 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, procurement, field support, finance, human resources, benefits, training, legal, and information technology, as well as our investments in our digital platform and subscription-based writing services.
Results of Operations - Summary
 
13 weeks ended
 
26 weeks ended
Dollars in thousands
October 28, 2017
 
October 29, 2016
 
October 28, 2017
 
October 29, 2016
Sales:
 
 
 
 
 
 
 
Product sales and other
$
817,825

 
$
697,927

 
$
1,152,327

 
$
915,663

Rental income
69,036

 
72,744

 
90,245

 
94,245

Total sales
$
886,861

 
$
770,671

 
$
1,242,572

 
$
1,009,908

 
 
 
 
 
 
 
 
Net income
$
48,395

 
$
29,289

 
$
13,612

 
$
1,373

 
 
 
 
 
 
 
 
Adjusted Earnings (non-GAAP) (a)
$
49,914

 
$
29,683

 
$
20,137

 
$
3,798

 
 
 
 
 
 
 
 
Adjusted EBITDA (non-GAAP) (a)
 
 
 
 
 
 
 
BNC
$
71,598

 
$
70,391

 
$
34,693

 
$
33,867

MBS
19,179

 

 
35,248

 

Elimination
11,658

 

 
45

 

Total Adjusted EBITDA (non-GAAP)
$
102,435

 
$
70,391

 
$
69,986

 
$
33,867

 
 
 
 
 
 
 
 
 
(a)
Adjusted Earnings and Adjusted EBITDA are a non-GAAP financial measures. See Adjusted Earnings (non-GAAP) and Adjusted EBITDA (non-GAAP) discussion below.

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Store Count
 
13 weeks ended October 28, 2017
 
13 weeks ended October 29, 2016
Number of Stores:
BNC Stores
 
MBS Direct Stores
 
BNC Stores
Opened

 
4

 
1

Closed
4

 
12

 

Opened at end of period
777

 
706

 
771

 
 
 
 
 
 
Comparable store sales (a)
(4.4
)%
 
N/A

 
(3.2
)%
 
 
26 weeks ended October 28, 2017
 
26 weeks ended October 29, 2016
Number of Stores:
BNC Stores
 
MBS Direct Stores
 
BNC Stores
Opened
24

 
14

 
34

Closed
16

 
20

 
14

Opened at end of period
777

 
706

 
771

 
 
 
 
 
 
Comparable store sales (a)
(3.9
)%
 
N/A

 
(3.3
)%

(a)
For BNC, effective for the first quarter of Fiscal 2017, comparable store sales includes sales from stores that have been open for an entire fiscal year period, does not include sales from closed stores for all periods presented, and digital agency sales are included on a gross basis. We believe the current comparable store sales calculation method better reflects the manner in which management views comparable sales, as well as the seasonal nature of our business. Prior year comparable store sales have been updated to exclude store inventory sales to MBS, which are reflected as intercompany inventory transfers since the acquisition.

The following table sets forth, for the periods indicated, the percentage relationship that certain items bear to total sales:
 
13 weeks ended
 
26 weeks ended
 
October 28, 2017
 
October 29, 2016
 
October 28, 2017
 
October 29, 2016
Sales:
 
 
 
 
 
 
 
Product sales and other
92.2
%
 
90.6
%
 
92.7
%
 
90.7
%
Rental income
7.8

 
9.4

 
7.3

 
9.3

Total sales
100.0

 
100.0

 
100.0

 
100.0

Cost of sales:
 
 
 
 
 
 
 
Product and other cost of sales (a)
76.9

 
79.4

 
78.7

 
80.0

Rental cost of sales (a)
60.1

 
61.4

 
60.6

 
62.1

Total cost of sales
75.6

 
77.7

 
77.4

 
78.3

Gross margin
24.4

 
22.3

 
22.6

 
21.7

Selling and administrative expenses
13.0

 
13.1

 
17.3

 
18.3

Depreciation and amortization expense
1.9

 
1.7

 
2.6

 
2.6

Restructuring and other charges

 

 
0.4

 
0.2

Transaction costs
0.1

 
0.1

 
0.1

 
0.2

Operating Income
9.4
%
 
7.4
%
 
2.2
%
 
0.4
%
 
(a)
Represents the percentage these costs bear to the related sales, instead of total sales.

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Results of Operations - 13 and 26 weeks ended October 28, 2017 compared with the 13 and 26 weeks ended October 29, 2016
 
13 weeks ended, October 28, 2017
 
13 weeks ended
Dollars in thousands
BNC (a)
 
MBS (b)
 
Eliminations
 
October 28,
2017
(a),(b)
 
October 29,
2016
Sales:
 
 
 
 
 
 
 
 
 
Product sales and other
$
694,585

 
$
133,017

 
$
(9,777
)
 
$
817,825

 
$
697,927

Rental income
67,202

 
1,834

 

 
69,036

 
72,744

Total sales
761,787

 
134,851

 
(9,777
)
 
886,861

 
770,671

Cost of sales:
 
 
 
 
 
 
 
 
 
Product and other cost of sales
549,625

 
100,649

 
(21,435
)
 
628,839

 
554,498

Rental cost of sales
40,437

 
1,027

 

 
41,464

 
44,659

Total cost of sales
590,062

 
101,676

 
(21,435
)
 
670,303

 
599,157

Gross profit
171,725

 
33,175

 
11,658

 
216,558

 
171,514

Selling and administrative expenses
100,127

 
15,021

 

 
115,148

 
101,123

Depreciation and amortization expense
15,086

 
1,618

 

 
16,704

 
12,987

Restructuring and other charges
193

 

 

 
193

 

Transaction costs
1,257

 

 

 
1,257

 
644

Operating income
$
55,062

 
$
16,536

 
$
11,658

 
$
83,256

 
$
56,760

 
 
 
 
 
 
 
 
 
 
 
26 weeks ended, October 28, 2017
 
26 weeks ended
Dollars in thousands
BNC (a)
 
MBS (b)
 
Eliminations
 
October 28,
2017
(a),(b)
 
October 29,
2016
Sales:
 
 
 
 
 
 
 
 
 
Product sales and other
$
924,128

 
$
272,043

 
$
(43,844
)
 
$
1,152,327

 
$
915,663

Rental income
87,636

 
2,609

 

 
90,245

 
94,245

Total sales
1,011,764

 
274,652

 
(43,844
)
 
1,242,572

 
1,009,908

Cost of sales:
 
 
 
 
 
 
 
 
 
Product and other cost of sales
738,014

 
212,455

 
(43,889
)
 
906,580

 
732,492

Rental cost of sales
53,288

 
1,433

 

 
54,721

 
58,489

Total cost of sales
791,302

 
213,888

 
(43,889
)
 
961,301

 
790,981

Gross profit
220,462

 
60,764

 
45

 
281,271

 
218,927

Selling and administrative expenses
185,769

 
28,789

 

 
214,558

 
185,060

Depreciation and amortization expense
28,468

 
3,253

 

 
31,721

 
25,908

Restructuring and other charges
5,429

 

 

 
5,429

 
1,790

Transaction costs
1,846

 

 

 
1,846

 
2,171

Operating (loss) income
$
(1,050
)
 
$
28,722

 
$
45

 
$
27,717

 
$
3,998

 
 
 
 
 
 
 
 
 
 
(a)
On August 3, 2017, we acquired Student Brands, LLC, a leading direct-to-student subscription-based writing services business. The condensed consolidated financial statements for the 13 and 26 weeks ended October 28, 2017 include the financial results of Student Brands in the BNC segment from the date of acquisition, August 3, 2017, and the condensed cons olidated financial statements for the 13 and 26 weeks ended October 29, 2016 exclude the financial results of Student Brands.
(b)
On February 27, 2017, we acquired MBS. The results of operations for the 13 and 26 weeks ended October 28, 2017 include the financial results of MBS and all material intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the 13 and 26 weeks ended October 29, 2016 exclude the financial results of MBS.

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Sales
The following table summarizes our sales for the 13 and 26 weeks ended October 28, 2017 and October 29, 2016 :
 
13 weeks ended
 
26 weeks ended
Dollars in thousands
October 28, 2017
 
October 29, 2016
 
%
 
October 28, 2017
 
October 29, 2016
 
%
Product sales and other
$
817,825

 
$
697,927

 
17.2%
 
$
1,152,327

 
$
915,663

 
25.8%
Rental income
69,036

 
72,744

 
(5.1)%
 
90,245

 
94,245

 
(4.2)%
Total Sales
$
886,861

 
$
770,671

 
15.1%
 
$
1,242,572

 
$
1,009,908

 
23.0%
Our sales increased $116.2 million, or 15.1%, to $886.9 million during the 13 weeks ended October 28, 2017 from $770.7 million during the 13 weeks ended October 29, 2016 . Our sales increased $232.7 million, or 23.0%, to $1,242.6 million during the 26 weeks ended October 28, 2017 from $1,009.9 million during the 26 weeks ended October 29, 2016 . Sales increased primarily due to the acquisition of MBS and Student Brands, partially offset by BNC comparable sales declines primarily due to lower student enrollment, specifically in two-year community colleges, increased consumer purchases directly from publishers and other online providers, and general weakness in the retail environment. The components of the variances for the 13 and 26 week periods are reflected in the table below.
Sales variances
 
13 weeks ended
 
26 weeks ended
Dollars in millions
 
October 28, 2017
 
October 29, 2016
 
October 28, 2017
 
October 29, 2016
MBS Sales (a)
 
 
 
 
 
 
 
 
Wholesale
 
$
47.5

 
$

 
$
140.0

 
$

Direct
 
87.4