Notes to Consolidated Financial Statements
For the 13 weeks ended July 29, 2017 and July 30, 2016
(Thousands of dollars, except per share data)
(unaudited)
The unaudited
consolidated financial statements include the accounts of Barnes & Noble, Inc. and its subsidiaries (collectively, Barnes & Noble or the Company).
In the opinion of the Companys management, the accompanying unaudited consolidated financial statements of the Company contain all
adjustments (consisting of only normal recurring adjustments) necessary to present fairly its consolidated financial position as of July 29, 2017 and the results of its operations for the 13 weeks and its cash flows for the 13 weeks then ended.
These consolidated financial statements are condensed and therefore do not include all of the information and footnotes required by generally accepted accounting principles. The consolidated financial statements should be read in conjunction with
the Companys Annual Report on Form
10-K
for the 52 weeks ended April 29, 2017 (fiscal 2017).
Due to the seasonal nature of the business, the results of operations for the 13 weeks ended July 29, 2017 are not indicative of the
results expected for the 52 weeks ending April 28, 2018 (fiscal 2018).
The Company provided credits to eligible customers resulting from the
settlement reached with Apple Inc. (Apple) in an antitrust lawsuit filed by various State Attorneys General and private class plaintiffs regarding the price of digital books. The Companys customers were entitled to $95,707 in total credits as
a result of the settlement, which was funded by Apple. If a customers credit was not used to make a purchase by June 24, 2017, the entire credit would have expired. The program concluded on July 1, 2017, through which date the
Companys customers had activated $60,385 in credits, of which $54,805 were redeemed. No balances are due from the Apple settlement fund as of July 29, 2017.
|
2.
|
Merchandise Inventories
|
Merchandise inventories, except NOOK merchandise inventories,
are stated at the lower of cost or market. Cost is determined primarily by the retail inventory method under the
first-in,
first-out
(FIFO) basis. NOOK merchandise
inventories are recorded based on the average cost method and are valued at the lower of cost and net realizable value.
Market is
determined based on the estimated net realizable value, which is generally the selling price. Reserves for
non-returnable
inventory are based on the Companys history of liquidating
non-returnable
inventory.
The Company also estimates and accrues 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.
Revenue from sales of the Companys products is recognized at
the time of sale or shipment, other than those with multiple elements and Free On Board (FOB) destination point shipping terms. The Company accrues for estimated sales returns in the period in which the related revenue is recognized based on
historical experience. ECommerce revenue from sales of products ordered through the Companys websites is recognized upon estimated delivery and receipt of the shipment by its customers. Freight costs are included within the Companys cost
of sales and occupancy. Sales taxes collected from retail customers are excluded from reported revenues. All of the Companys sales are recognized as revenue on a net basis, including sales in connection with any periodic promotions
offered to customers. The Company does not treat any promotional offers as expenses.
In accordance with ASC
605-25,
Revenue Recognition, Multiple-Element Arrangements,
and Accounting Standards Updates (ASU)
2009-13
and
2009-14,
for
multiple-element arrangements that involve tangible products that contain software that is essential to the tangible products functionality, undelivered software elements that relate to the tangible products essential software and other
separable elements, the Company allocates revenue to all deliverables using the relative selling-price method. Under this method, revenue is allocated at the time of sale to all deliverables based on their relative selling price using a specific
hierarchy. The hierarchy is as follows: vendor-specific objective evidence, third-party evidence of selling price, or best estimate of selling price. NOOK
®
device revenue is recognized at the
segment point of sale.
8
The Company includes post-service customer support (PCS) in the form of software updates and
potential increased functionality on a
when-and-if-available
basis with the purchase of a NOOK
®
from the Company. Using the relative selling-price method described above, the Company allocates revenue based on the best estimate of selling price for the deliverables as no vendor-specific
objective evidence or third-party evidence exists for any of the elements. Revenue allocated to NOOK
®
and the software essential to its functionality is recognized at the time of sale,
provided all other conditions for revenue recognition are met. Revenue allocated to the PCS is deferred and recognized on a straight-line basis over the
2-year
estimated life of a NOOK
®
device.
The average percentage
of a NOOK
®
s sales price that is deferred for undelivered items and recognized over its
2-year
estimated life ranges between 0% and 5%, depending
on the type of device sold. The amount of NOOK
®
-related deferred revenue as of July 29, 2017, July 30, 2016 and April 29, 2017 was $176, $94 and $226, respectively. These
amounts are classified on the Companys balance sheet in accrued liabilities for the portion that is subject to deferral for one year or less and other long-term liabilities for the portion that is subject to deferral for more than one year.
The Company also pays certain vendors who distributed NOOK
®
a commission on the
content sales sold through that device. The Company accounted for these transactions as a reduction in the sales price of the NOOK
®
based on historical trends of content sales and a liability
was established for the estimated commission expected to be paid over the life of the product. The Company recognizes revenue of the content at the point of sale of the content. The Company records revenue from sales of digital content, sales of
third-party extended warranties, service contracts and other products, for which the Company is not obligated to perform, and for which the Company does not meet the criteria for gross revenue recognition under ASC
605-45-45,
Reporting Revenue Gross as a Principal versus Net as an Agent
, on a net basis. All other revenue is recognized on a gross basis.
The Company rents physical textbooks. Revenue from the rental of physical textbooks is deferred and recognized over the rental period
commencing at point of sale. The Company offers a buyout option to allow the purchase of a rented book at the end of the semester. The Company records the buyout purchase when the customer exercises and pays the buyout option price. In
these instances, the Company would accelerate any remaining deferred rental revenue at the point of sale.
NOOK acquires the rights to
distribute digital content from publishers and distributes the content on www.barnesandnoble.com, NOOK
®
devices and other eBookstore platforms. Certain digital content is distributed under an
agency pricing model, in which the publishers set prices for eBooks and NOOK receives a commission on content sold through the eBookstore. The majority of the Companys eBooks are sold under the agency model.
The Barnes & Noble Member Program offers members greater discounts and other benefits for products and services, as well as exclusive
offers and promotions via
e-mail
or direct mail, for an annual fee of $25.00, which is
non-refundable
after the first 30 days. Revenue is recognized over the
12-month
period based upon historical spending patterns for Barnes & Noble Members.
|
4.
|
Research and Development Costs for Software Products
|
The Company follows the guidance
in ASC
985-20,
Cost of Software to Be Sold, Leased or Marketed
, regarding research and development costs for software products to be sold, leased, or otherwise marketed. Capitalization of software
development costs begins upon the establishment of technological feasibility and is discontinued when the product is available for sale. A certain amount of judgment and estimation is required to assess when technological feasibility is established,
as well as the ongoing assessment of the recoverability of capitalized costs. The Companys products reach technological feasibility shortly before the products are released and, therefore, research and development costs are generally expensed
as incurred.
|
5.
|
Internal-Use
Software and Website Development Costs
|
Direct costs incurred to develop software for internal use and website development costs are capitalized and amortized over an estimated
useful life of three to seven years. The Company capitalized costs, primarily related to labor, consulting, hardware and software, of $2,681 and $6,341 during the 13 weeks ended July 29, 2017 and July 30, 2016, respectively. Amortization
of previously capitalized amounts was $5,374 and $6,595 during the 13 weeks ended July 29, 2017 and July 30, 2016, respectively. Costs related to the design or maintenance of
internal-use
software
and website development are expensed as incurred.
|
6.
|
Net Earnings (Loss) per Share
|
In accordance with ASC
260-10-45,
Share-Based Payment Arrangements and Participating Securities and the
Two-Class
Method
, unvested share-based payment awards that contain rights to
receive
non-forfeitable
dividends are considered participating securities. The Companys unvested restricted shares and unvested restricted stock units granted prior to July 15, 2015 and shares
issuable under the Companys deferred compensation plan were considered participating securities. Cash dividends to
9
restricted stock units and performance-based stock units granted on or after July 15, 2015 are not distributed until and except to the extent that the restricted stock units vest, and in the
case of performance-based stock units, until and except to the extent that the performance metrics are achieved or are otherwise deemed satisfied. Stock options do not receive cash dividends. As such, these awards are not considered participating
securities.
Basic earnings per common share are calculated by dividing the net income, adjusted for preferred dividends and income
allocated to participating securities, by the weighted average number of common shares outstanding during the period. Diluted net income per common share reflects the dilution that would occur if any potentially dilutive instruments were
exercised or converted into common shares. The dilutive effect of participating securities is calculated using the more dilutive of the treasury stock method or
two-class
method. Other potentially
dilutive securities include preferred stock, stock options, restricted stock units granted after July 15, 2015, and performance-based stock units and are included in diluted shares to the extent they are dilutive under the treasury stock method for
the applicable periods.
During periods of net loss, no effect is given to the participating securities because they do not share in the
losses of the Company. Due to the net loss during the 13 weeks ended July 29, 2017 and July 30, 2016, participating securities in the amounts of 110,386 and 1,386,935, respectively, were excluded from the calculation of loss per share
using the
two-class
method because the effect would be antidilutive. The Companys outstanding
non-participating
securities consisting of dilutive stock options and
restricted stock units of 8,417 and 206,372 for the 13 weeks ended July 29, 2017 and July 30, 2016, respectively, were excluded from the calculation of loss per share using the
two-class
method
because the effect would be antidilutive.
The following is a reconciliation of the Companys basic and diluted loss per share
calculation:
|
|
|
|
|
|
|
|
|
|
|
13 weeks ended
|
|
|
|
July 29,
2017
|
|
|
July 30,
2016
|
|
Numerator for basic loss per share:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,778
|
)
|
|
|
(14,416
|
)
|
Less allocation of dividends to participating securities
|
|
|
(11
|
)
|
|
|
(203
|
)
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders
|
|
$
|
(10,789
|
)
|
|
|
(14,619
|
)
|
|
|
|
|
|
|
|
|
|
Numerator for diluted loss per share:
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders
|
|
$
|
(10,789
|
)
|
|
|
(14,619
|
)
|
Denominator for basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common shares
|
|
|
72,453
|
|
|
|
72,903
|
|
Loss per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.15
|
)
|
|
|
(0.20
|
)
|
Diluted
|
|
$
|
(0.15
|
)
|
|
|
(0.20
|
)
|
The Companys two operating segments are B&N Retail and
NOOK.
B&N Retail
This
segment includes 632 bookstores as of July 29, 2017, primarily under the Barnes & Noble Booksellers trade name. These Barnes & Noble stores generally offer a comprehensive trade book title base, a café, and departments
dedicated to Juvenile, Toys & Games, DVDs, Music & Vinyl, Gift, Magazine, Bargain products and a dedicated NOOK
®
area. The stores also offer a calendar of ongoing events,
including author appearances and childrens activities. The B&N Retail segment also includes the Companys eCommerce website, www.barnesandnoble.com, and its publishing operation, Sterling Publishing Co., Inc.
NOOK
This segment includes the
Companys digital business, including the development and support of the Companys NOOK
®
product offerings. The digital business includes digital content such as eBooks, digital
newsstand and sales of NOOK
®
devices and accessories to B&N Retail.
10
Summarized financial information concerning the Companys reportable segments is presented
below:
|
|
|
|
|
|
|
|
|
Sales by Segment
|
|
13 weeks ended
|
|
|
|
July 29,
2017
|
|
|
July 30,
2016
|
|
B&N Retail
|
|
$
|
830,036
|
|
|
|
881,713
|
|
NOOK
|
|
|
29,500
|
|
|
|
41,048
|
|
Elimination
(a)
|
|
|
(6,220
|
)
|
|
|
(8,879
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
853,316
|
|
|
|
913,882
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by Product Line
|
|
13 weeks ended
|
|
|
|
July 29,
2017
|
|
|
July 30,
2016
|
|
Media
(b)
|
|
|
73
|
%
|
|
|
72
|
%
|
Digital
(c)
|
|
|
3
|
%
|
|
|
4
|
%
|
Other
(d)
|
|
|
24
|
%
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
13 weeks ended
|
|
|
|
July 29,
2017
|
|
|
July 30,
2016
|
|
B&N Retail
|
|
$
|
23,079
|
|
|
|
24,962
|
|
NOOK
|
|
|
3,319
|
|
|
|
6,075
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,398
|
|
|
|
31,037
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
13 weeks ended
|
|
|
|
July 29,
2017
|
|
|
July 30,
2016
|
|
B&N Retail
|
|
$
|
(12,510
|
)
|
|
|
(7,367
|
)
|
NOOK
|
|
|
(2,702
|
)
|
|
|
(14,022
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(15,212
|
)
|
|
|
(21,389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
13 weeks ended
|
|
|
|
July 29,
2017
|
|
|
July 30,
2016
|
|
B&N Retail
|
|
$
|
18,899
|
|
|
|
21,826
|
|
NOOK
|
|
|
1,806
|
|
|
|
976
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,705
|
|
|
|
22,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
(e)
|
|
|
|
|
|
|
|
|
July 29,
2017
|
|
|
July 30,
2016
|
|
B&N Retail
|
|
$
|
1,905,471
|
|
|
|
1,925,281
|
|
NOOK
(f)
|
|
|
29,887
|
|
|
|
122,873
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,935,358
|
|
|
|
2,048,154
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Represents sales from NOOK to B&N Retail on a sell-through basis.
|
(b)
|
Includes tangible books, music, movies, rentals and newsstand.
|
(c)
|
Includes NOOK
®
, related accessories, eContent and warranties.
|
(d)
|
Includes Toys & Games, café products, gifts and miscellaneous other.
|
(e)
|
Excludes intercompany balances.
|
(f)
|
Decrease in assets is related to the net tax receivable position.
|
11
A reconciliation of operating loss from reportable segments to loss before taxes in the
consolidated financial statements is as follows:
|
|
|
|
|
|
|
|
|
|
|
13 weeks ended
|
|
|
|
July 29,
2017
|
|
|
July 30,
2016
|
|
Reportable segments operating loss
|
|
$
|
(15,212
|
)
|
|
|
(21,389
|
)
|
Interest expense, net and amortization of deferred financing fees
|
|
|
2,040
|
|
|
|
1,629
|
|
|
|
|
|
|
|
|
|
|
Consolidated loss before taxes
|
|
$
|
(17,252
|
)
|
|
|
(23,018
|
)
|
|
|
|
|
|
|
|
|
|
|
8.
|
Intangible Assets and Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 29, 2017
|
|
Amortizable Intangible Assets
|
|
Useful
Life
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Total
|
|
Technology
|
|
|
5-10
|
|
|
$
|
10,710
|
|
|
|
(10,099
|
)
|
|
$
|
611
|
|
Distribution contracts
|
|
|
10
|
|
|
|
8,325
|
|
|
|
(8,275
|
)
|
|
|
50
|
|
Other
|
|
|
3-10
|
|
|
|
6,463
|
|
|
|
(6,408
|
)
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,498
|
|
|
|
(24,782
|
)
|
|
$
|
716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortizable Intangible Assets
|
|
|
|
Trade name
|
|
$
|
293,400
|
|
Publishing contracts
|
|
|
15,894
|
|
|
|
|
|
|
|
|
$
|
309,294
|
|
|
|
|
|
|
Total amortizable and unamortizable intangible assets as of July 29, 2017
|
|
$
|
310,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 30, 2016
|
|
Amortizable Intangible Assets
|
|
Useful
Life
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Total
|
|
Technology
|
|
|
5-10
|
|
|
$
|
10,710
|
|
|
|
(9,691
|
)
|
|
$
|
1,019
|
|
Distribution contracts
|
|
|
10
|
|
|
|
8,325
|
|
|
|
(7,979
|
)
|
|
|
346
|
|
Other
|
|
|
3-10
|
|
|
|
6,375
|
|
|
|
(6,321
|
)
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,410
|
|
|
|
(23,991
|
)
|
|
$
|
1,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortizable Intangible Assets
|
|
|
|
Trade name
|
|
$
|
293,400
|
|
Publishing contracts
|
|
|
15,894
|
|
|
|
|
|
|
|
|
$
|
309,294
|
|
|
|
|
|
|
Total amortizable and unamortizable intangible assets as of July 30, 2016
|
|
$
|
310,713
|
|
|
|
|
|
|
All amortizable intangible assets are being amortized over their useful life on a straight-line basis.
|
|
|
|
|
Aggregate Amortization Expense
|
|
|
|
For the 13 weeks ended July 29, 2017
|
|
$
|
200
|
|
For the 13 weeks ended July 30, 2016
|
|
$
|
191
|
|
|
|
|
|
|
Estimated Amortization Expense
|
|
|
|
(12 months ending on or about April 30)
|
|
|
|
|
2018
|
|
$
|
591
|
|
2019
|
|
$
|
325
|
|
The carrying amount of goodwill was $207,381 and $211,276 as of July 29, 2017 and July 30, 2016,
respectively.
12
The Company sells gift cards, which can be used in its stores, on
www.barnesandnoble.com, on NOOK
®
devices and at Barnes & Noble Education, Inc. (B&N Education) stores. The Company does not charge administrative or dormancy fees on gift cards
and gift cards have no expiration dates. Upon the purchase of a gift card, a liability is established for its cash value. Revenue associated with gift cards is deferred until redemption of the gift card. Gift cards redeemed at B&N Education are
funded by the gift card liability at the Company. Over time, a portion of the gift cards issued is typically not redeemed. The Company estimates the portion of the gift card liability for which the likelihood of redemption is remote based upon the
Companys historical redemption patterns. The Company records this amount in revenue on a straight-line basis over a
12-month
period beginning in the
13
th
month after the month the gift card was originally sold. Additional breakage may be required if gift card redemptions continue to run lower than historical patterns.
The Company recognized gift card breakage of $4,870 and $4,921 during the 13 weeks ended July 29, 2017 and July 30, 2016,
respectively. The Company had gift card liabilities of $337,965 and $360,679 as of July 29, 2017 and July 30, 2016, respectively.
|
10.
|
Other Long-Term Liabilities
|
Other long-term liabilities consist primarily of deferred
rent, tax liabilities and reserves, long-term insurance liabilities and asset retirement obligations. The Company provides for minimum rent expense over the lease terms (including the
build-out
period) on
a straight-line basis. The excess of such rent expense over actual lease payments (net of tenant allowances) is classified as deferred rent. Other long-term liabilities also include store closing expenses, long-term deferred revenues and a
health care and life insurance plan for certain retired employees. The Company had the following other long-term liabilities at July 29, 2017, July 30, 2016 and April 29, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 29,
2017
|
|
|
July 30,
2016
|
|
|
April 29,
2017
|
|
Deferred rent
|
|
$
|
57,273
|
|
|
|
65,190
|
|
|
|
59,142
|
|
Tax liabilities and reserves
|
|
|
8,711
|
|
|
|
13,758
|
|
|
|
8,711
|
|
Insurance liabilities
|
|
|
14,410
|
|
|
|
15,599
|
|
|
|
14,225
|
|
Asset retirement obligations
|
|
|
11,488
|
|
|
|
11,681
|
|
|
|
11,482
|
|
Other
|
|
|
5,217
|
|
|
|
5,113
|
|
|
|
5,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other long-term liabilities
|
|
$
|
97,099
|
|
|
|
111,341
|
|
|
|
99,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded an income tax benefit of $6,474 on a
pre-tax
loss of $17,252 during the 13 weeks ended July 29, 2017, which represented an effective income tax rate of 37.5%. The Company recorded an income tax benefit of $8,602 on a
pre-tax
loss of $23,018 during the 13 weeks ended July 30, 2016, which represented an effective income tax rate of 37.4%. The Companys effective tax rate differs from the statutory rate due to the
impact of permanent items such as meals and entertainment,
non-deductible
executive compensation, tax credits, changes in uncertain tax positions and state tax provision, net of federal benefit. The Company
continues to maintain a valuation allowance against certain state items.
During the 13 weeks ended July 29, 2017, the Company recognized
$566 tax expense as a result of the adoption of ASU 2016-09, which requires all excess tax benefits or deficiencies from share-based payments to be recognized as income tax expense or benefit in the consolidated statement of operations as discrete
in the reporting period in which they occur. Additionally, the Company recorded unrecognized excess tax benefits of $1,823 as a cumulative-effect adjustment, which increased retained earnings, and reduced deferred taxes by the same.
The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits at July 29, 2017 could decrease by
approximately $3,568 within the next twelve months, as a result of settlement of certain tax audits or lapses of statutes of limitations, which could impact the effective tax rate.
13
|
12.
|
Fair Values of Financial Instruments
|
In accordance with ASC 820,
Fair Value
Measurements and Disclosures
(ASC 820), 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 liabilitys 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 the Company to develop its own assumptions
|
The Companys financial instruments include cash, receivables, gift cards, accrued liabilities, accounts
payable and its credit facility. The fair values of cash, receivables, gift cards, accrued liabilities and accounts payable approximate carrying values because of the short-term nature of these instruments. The Company believes that its credit
facility approximates fair value since interest rates are adjusted to reflect current rates.
On August 3, 2015, the Company and certain of its
subsidiaries entered into a credit agreement (Credit Agreement) with Bank of America, N.A., as administrative agent, collateral agent and swing line lender, and the other lenders from time to time party thereto, under which the lenders committed to
provide a five-year asset-backed revolving credit facility in an aggregate committed principal amount of up to $700,000 (Revolving Credit Facility). On September 30, 2016, the Company amended the Credit Agreement to provide for a new
first-in,
last-out
revolving credit facility (the FILO Credit Facility and, together with the Revolving Credit Facility, the Credit Facility) in an aggregate
principal amount of up to $50,000, which supplements availability under the Revolving Credit Facility. The Company generally must draw down the FILO Credit Facility before making any borrowings under the Revolving Credit Facility.
Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities LLC, Wells Fargo Bank, N.A. and SunTrust Robinson
Humphrey, Inc. are the joint lead arrangers for the Credit Facility. The Credit Facility replaced the prior credit facility. Proceeds from the Credit Facility are used for general corporate purposes, including seasonal working capital needs.
The Company and certain of its subsidiaries are permitted to borrow under the Credit Facility. The Credit Facility is secured by substantially
all of the inventory, accounts receivable and related assets of the borrowers under the Credit Facility (collectively, the Loan Parties), but excluding the equity interests in the Company and its subsidiaries, intellectual property, equipment and
certain other property. Borrowings under the Credit Facility are limited to a specified percentage of eligible collateral. The Company has the option to request an increase in commitments under the Credit Facility of up to $250,000, subject to
certain restrictions.
The Credit Facility allows the Company to declare and pay up to $70,000 in dividends annually to its stockholders
without compliance with any availability or ratio-based limitations.
Interest under the Revolving Credit Facility accrues, at the
election of the Company, at a LIBOR or alternate base rate, plus, in each case, an applicable interest rate margin, which is determined by reference to the level of excess availability under the Revolving Credit Facility. Through the end of the
fiscal quarter during which the closing of the Revolving Credit Facility occurred, loans under the Revolving Credit Facility bore interest at LIBOR plus 1.750% per annum, in the case of LIBOR borrowings, or at the alternate base rate plus 0.750% per
annum, in the alternative, and thereafter the interest rate began to fluctuate between LIBOR plus 2.000% per annum and LIBOR plus 1.500% per annum (or between the alternate base rate plus 1.000% per annum and the alternate base rate plus 0.500% per
annum), based upon the average daily availability under the Revolving Credit Facility for the immediately preceding fiscal quarter. Interest under the FILO Credit Facility accrues, at the election of the Company, at a LIBOR or alternate base rate,
plus, in each case, an applicable interest rate margin, which is also determined by reference to the level of excess availability under the Revolving Credit Facility. Loans under the FILO Credit Facility bear interest at 1.000% per annum more than
loans under the Revolving Credit Facility.
The Credit Agreement contains customary negative covenants, which limit the Companys
ability to incur additional indebtedness, create liens, make investments, make restricted payments or specified payments and merge or acquire assets, among other things. In addition, if excess availability under the Credit Facility were to fall
below certain specified levels, certain additional
covenants (including fixed charge coverage ratio requirements) would be triggered, and the lenders
would assume dominion and
control over the Loan Parties cash.
14
The Credit Agreement contains customary events of default, including payment defaults, material
breaches of representations and warranties, covenant defaults, default on other material indebtedness, customary ERISA events of default, bankruptcy and insolvency, material judgments, invalidity of liens on collateral, change of control or
cessation of business. The Credit Agreement also contains customary affirmative covenants and representations and warranties.
The Company
wrote off $460 of deferred financing fees related to the prior credit facility during the second quarter of fiscal 2016 and the remaining unamortized deferred financing fees of $3,542 were deferred and are being amortized over the five-year term of
the Credit Facility. The Company also incurred $5,701 of fees to secure the Credit Facility, which are being amortized over the five-year term accordingly. During the second quarter of fiscal 2017, the Company incurred $474 of fees to secure the
FILO Credit Facility, which are being amortized over the same term as the Credit Facility.
The Company had $84,100 and $64,600 of
outstanding debt under the Credit Facility as of July 29, 2017 and July 30, 2016, respectively. The Company had $35,833 and $38,895 of outstanding letters of credit under its Credit Facility as of July 29, 2017 and July 30, 2016,
respectively.
|
14.
|
Stock-Based Compensation
|
For the 13 weeks ended July 29, 2017 and
July 30, 2016, the Company recognized stock-based compensation expense in selling and administrative expenses as follows:
|
|
|
|
|
|
|
|
|
|
|
13 weeks ended
|
|
|
|
July 29,
2017
|
|
|
July 30,
2016
|
|
Restricted Stock Expense
|
|
$
|
210
|
|
|
|
210
|
|
Restricted Stock Units Expense
|
|
|
909
|
|
|
|
2,561
|
|
Performance-Based Stock Unit Expense
|
|
|
204
|
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
Stock-Based Compensation Expense
|
|
$
|
1,323
|
|
|
|
3,075
|
|
|
|
|
|
|
|
|
|
|
|
15.
|
Defined Contribution Plan
|
The Company maintains a defined contribution plan (the
Savings Plan) for the benefit of substantially all employees. Total Company contributions charged to employee benefit expenses for the Savings Plan were $3,049 and $3,387 for the 13 weeks ended July 29, 2017 and July 30, 2016,
respectively.
On October 20, 2015, the Companys Board of Directors
authorized a stock repurchase program (prior repurchase plan) of up to $50,000 of its common shares. On March 15, 2017, subsequent to completing the prior repurchase plan, the Companys Board of Directors authorized a new stock
repurchase program of up to $50,000 of its common shares. Stock repurchases under this program may be made through open market and privately negotiated transactions from time to time and in such amounts as management deems appropriate. The new
stock repurchase program has no expiration date and may be suspended or discontinued at any time. The Companys repurchase plan is intended to comply with the requirements of Rule
10b-18
under the
Securities Exchange Act of 1934. The Company did not repurchase shares under this plan during the 13 weeks ended July 29, 2017. During the 13 weeks ended July 30, 2016, the Company repurchased 830,583 shares at a cost of $9,743 under the
prior repurchase plan. The Company has remaining capacity of $50,000 under the new repurchase program as of July 29, 2017.
As of
July 29, 2017, the Company has repurchased 39,558,301 shares at a cost of approximately $1,086,869 since the inception of the Companys stock repurchase programs. The repurchased shares are held in treasury.
The Company is involved in a variety of claims, suits,
investigations and proceedings that arise from time to time in the ordinary course of its business, including actions with respect to contracts, intellectual property, taxation, employment, benefits,
securities, 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 the Companys consolidated financial position or results of operations.
15
The Company records a liability when it believes that it is both probable that a liability will
be incurred, and the amount of loss can be reasonably estimated. The Company evaluates, at least quarterly, developments in its legal matters that could affect the amount of liability that has been previously accrued and makes adjustments as
appropriate. Significant judgment is required to determine both probability and the estimated amount of a loss or potential loss. The Company may be unable to reasonably estimate the reasonably possible loss or range of loss for a particular legal
contingency for various reasons, including, among others: (i) if the damages sought are indeterminate; (ii) if proceedings are in the early stages; (iii) if there is uncertainty as to the outcome of pending proceedings (including
motions and appeals); (iv) if there is uncertainty as to the likelihood of settlement and the outcome of any negotiations with respect thereto; (v) if there are significant factual issues to be determined or resolved; (vi) if the
proceedings involve a large number of parties; (vii) if relevant law is unsettled or novel or untested legal theories are presented; or (viii) if the proceedings are taking place in jurisdictions where the laws are complex or unclear. In
such instances, there is considerable uncertainty regarding the ultimate resolution of such matters, including a possible eventual loss, if any.
Legal matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond the Companys control. As
such, there can be no assurance that the final outcome of these matters will not materially and adversely affect the Companys business, financial condition, results of operations, or cash flows.
Except as otherwise described below with respect to the Adrea LLC
(Adrea) matter, the Company has determined that a loss is reasonably
possible with respect to the matters described below. Based on its current knowledge, the Company has determined that the amount of loss or range of loss that is reasonably possible, including any reasonably possible losses in excess of amounts
already accrued, is not estimable. With respect to the Adrea matter, the Company has determined there will be a loss, as described below.
The following is a discussion of the material legal matters involving the Company.
PIN Pad Litigation
As previously disclosed, the Company discovered that PIN pads in certain of its stores had been tampered with to allow criminal access to card
data and PIN numbers on credit and debit cards swiped through the terminals. Following public disclosure of this matter on October 24, 2012, the Company was served with four putative class action complaints (three in federal district court
in the Northern District of Illinois and one in the Northern District of California), each of which alleged on behalf of national and other classes of customers who swiped credit and debit cards in Barnes & Noble Retail stores common law
claims such as negligence, breach of contract and invasion of privacy, as well as statutory claims such as violations of the Fair Credit Reporting Act, state data breach notification statutes, and state unfair and deceptive practices
statutes. The actions sought various forms of relief including damages, injunctive or equitable relief, multiple or punitive damages, attorneys fees, costs, and interest. All four cases were transferred and/or assigned to a single
judge in the United States District Court for the Northern District of Illinois, and a single consolidated amended complaint was filed. The Company filed a motion to dismiss the consolidated amended complaint in its entirety, and in September
2013, the Court granted the motion to dismiss without prejudice. The Plaintiffs then filed an amended complaint, and the Company filed a second motion to dismiss. On October 3, 2016, the Court granted the second motion to dismiss, and
dismissed the case without prejudice; in doing so, the Court permitted plaintiffs to file a second amended complaint by October 31, 2016. On October 31, 2016, the plaintiffs filed a second amended complaint, and on January 25,
2017 the Company filed a motion to dismiss the second amended complaint. On June 13, 2017, the Court granted the Companys motion to dismiss with prejudice. Plaintiffs filed a notice of appeal to the United States Court of Appeals for the
Seventh Circuit, and that appeal is currently being briefed. No hearing date has been established by the Court.
Cassandra Carag
individually and on behalf of others similarly situated v. Barnes & Noble, Inc., Barnes & Noble Booksellers, Inc. and DOES 1 through 100 inclusive
On November 27, 2013, former Associate Store Manager Cassandra Carag (Carag) brought suit in Sacramento County Superior Court, asserting
claims on behalf of herself and all other hourly
(non-exempt)
Barnes & Noble employees in California in the preceding four years for unpaid regular and overtime wages based on alleged
off-the-clock
work, penalties and pay based on missed meal and rest breaks, and for improper wage statements, payroll records, and untimely pay at separation as a result of
the alleged pay errors during employment. Via the complaint, Carag seeks to recover unpaid wages and statutory penalties for all hourly Barnes & Noble employees within California from November 27, 2009 to present. On February 13,
2014, the Company filed an answer to the complaint in the state court and concurrently requested removal of the action to federal court. On May 30, 2014, the federal court granted Plaintiffs motion to remand the case to state court and
denied Plaintiffs motion to strike portions of the
answer to the complaint (referring the latter motion to the lower court for future
consideration). The Court has not yet scheduled any further hearings or deadlines.
16
Adrea LLC v. Barnes & Noble, Inc., barnesandnoble.com llc and NOOK Media LLC
As previously reported, final judgment has been rendered in this case and there has been no appeal by either party on the
merits. The final judgment, plus postjudgment interest, totaling $284 has been paid in full during the second quarter of fiscal 2018. Litigation continues with respect to the award of costs to the plaintiff in the amount of $45.
Barnes & Noble does not intend to report on this case in future periodic reports in light of the immateriality of this amount.
Café Manager Class Actions
Two former Café Managers have filed separate actions alleging similar claims of entitlement to unpaid compensation for overtime. In
each action, the plaintiff seeks to represent a class of allegedly similarly situated employees who performed the same position (Café Manager). Specifically, Christine Hartpence filed a complaint against Barnes & Noble, Inc.
(Barnes & Noble) in Philadelphia County Court of Common Pleas on May 26, 2015 (Case No.: 160503426), alleging that she is entitled to unpaid compensation for overtime under Pennsylvania law and seeking to represent a class of allegedly
similarly situated employees who performed the same position (Café Manager). On July 14, 2016, Ms. Hartpence amended her complaint to assert a purported collective action for alleged unpaid overtime compensation under the federal
Fair Labor Standards Act (FLSA), by which she sought to act as a class representative for similarly situated Café Managers throughout the United States. On July 27, 2016, Barnes & Noble removed the case to the U.S. District
Court of the Eastern District of Pennsylvania (Case No.:
16-4034). Ms. Hartpence
then voluntarily dismissed her complaint and subsequently
re-filed
a similar
complaint in the Philadelphia County Court of Common Pleas (Case No.: 161003213), where it is currently pending. The
re-filed
complaint alleges only claims of unpaid overtime under Pennsylvania law and
alleges class claims under Pennsylvania law that are limited to current and former Café Managers within Pennsylvania. On June 22, 2017, Ms. Hartpence filed an additional, separate action in Philadelphia County Court of Common
Pleas (Case No.: 170602515) in which she repeats her allegations under Pennsylvania law and asserts a similar claim for unpaid wages under New Jersey law, purportedly on behalf of herself and others similarly situated.
On September 20, 2016, Kelly Brown filed a complaint against Barnes & Noble in the U.S. District Court for the Southern District
of New York (Case No.:
16-7333)
in which she also alleges that she is entitled to unpaid compensation under the FLSA and Illinois law. Ms. Brown seeks to represent a national class of all similarly
situated Café Managers under the FLSA, as well as an Illinois-based class under Illinois law. On November 9, 2016, Ms. Brown filed an amended complaint to add an additional plaintiff named Tiffany Stewart, who is a former
Café Manager who also alleges unpaid overtime compensation in violation of New York law and seeks to represent a class of similarly situated New York-based Café Managers under New York law. Since the commencement of the action, nine
former Café Managers have filed consent forms to join the action as plaintiffs. On May 2, 2017, the Court denied Plaintiffs Motion for Conditional Certification, without prejudice.
Bernardino v. Barnes & Noble Booksellers, Inc.
On June 16, 2017, a putative class action complaint was filed against Barnes & Noble Booksellers, Inc. (B&N Booksellers) in
the United States District Court for the Southern District of New York, alleging violations of the federal Video Privacy Protection Act and related New York law. The plaintiff, who seeks to represent a class of subscribers of Facebook, Inc.
(Facebook) who purchased DVDs or other video media from the Barnes & Noble website, seeks damages, injunctive relief and attorneys fees, among other things, based on her allegation that B&N Booksellers supposedly knowingly
disclosed her personally identifiable information to Facebook without her consent when she bought a DVD from Barnes & Nobles website. On July 10, 2017, the plaintiff moved for a preliminary injunction requiring Barnes &
Noble to change the operation of its website, which motion B&N Booksellers opposed. On July 31, 2017, B&N Booksellers moved to compel the case to arbitration, consistent with the terms of use on Barnes & Nobles website.
On August 28, 2017, the court denied the plaintiffs motion for a preliminary injunction.
|
18.
|
Recent Accounting Pronouncements
|
In October 2016, the FASB issued ASU
2016-16,
Income Taxes (Topic 740) Intra-Entity Transfers of Assets Other Than Inventory
(ASU
2016-16).
This standard requires that an entity should recognize the
income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments in this standard eliminate the exception for an intra-entity transfer of an asset other than inventory. The
amendments in this standard do not include new disclosure requirements; however, existing disclosure requirements might be applicable. The Company will be required to adopt ASU
2016-16
as of April 29,
2018 using a modified retrospective approach. Early adoption is permitted. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.
17
In August 2016, the FASB issued ASU
2016-15,
Statement
of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments
(ASU
2016-15).
This update clarifies the classification of certain cash receipts and cash payments in the
statement of cash flows, including debt prepayment or extinguishment costs, settlement of contingent consideration arising from a business combination, insurance settlement proceeds, and distributions from certain equity method investees. The new
standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. ASU
2016-15
is effective for the Company beginning
May 1, 2018 under a retrospective approach. Since the standard only impacts classification in the statements of cash flows, adoption will not affect the Companys cash and cash equivalents.
In March 2016, the FASB issued ASU
2016-09,
Compensation Stock Compensation (Topic 718)
Improvements to Employee Share-Based Payment Accounting
(ASU
2016-09).
ASU
2016-09
includes provisions to simplify certain aspects related to the accounting
for share-based awards and the related financial statement presentation. ASU
2016-09
provides for changes to accounting for stock compensation, including: 1) excess tax benefits and tax deficiencies related to
share based payment awards to be recognized as income tax benefit or expense when the awards vest or are settled (previously such amounts were recognized in additional
paid-in
capital); entities must apply the
new guidance on accounting for excess tax benefits and tax deficiencies prospectively, except for excess tax benefits that were identified from previous transactions that had not been previously recognized because the related tax deduction did not
reduce income taxes payable; entities must use a modified retrospective transition method to recognize such excess tax benefits as a credit to retained earnings; any deferred tax assets recorded in connection with the modified retrospective
recognition of excess tax benefits must be assessed for realizability, and, if necessary, a valuation allowance must be recognized through a cumulative-effect adjustment to retained earnings; 2) excess tax benefits will be classified as an operating
activity in the statement of cash flows; 3) the option to elect to estimate forfeitures or account for them when they occur; 4) classification of cash payments made on an employees behalf for withheld shares should be presented as a financing
activity in the statements of cash flows; and 5) eliminating the requirement to delay the recognition of excess tax benefits until it reduces current taxes payable.
The Company adopted ASU
2016-09
during the first quarter ended July 29, 2017. Accordingly, the
primary effects of the adoption are as follows: 1) excess tax expense of $566 were recorded during the 13 weeks ended July 29, 2017 related to the prospective application of excess tax benefits and tax deficiencies related to stock-based
compensation settlements, 2) using a modified retrospective application, the Company recorded unrecognized excess tax benefits of $1,823 as a cumulative-effect adjustment, which increased retained earnings, and reduced deferred taxes by the same, 3)
using a modified retrospective application, the Company has elected to recognize forfeitures as they occur and recorded a $1,310 increase to additional
paid-in
capital, a $786 reduction to retained earnings,
and a $524 reduction to deferred taxes to reflect the incremental stock-based compensation expense, net of the related tax impacts, that would have been recognized in prior years under the modified guidance, and 4) $7 in excess tax benefits from
stock-based compensation was reclassified from cash flows from financing activities to cash flows from operating activities for the 13 weeks ended July 30, 2016, in the Consolidated Statements of Cash Flows.
In February 2016, the FASB issued ASU
2016-02,
Leases (Topic 842)
(ASU
2016-02),
in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous
Generally Accepted Accounting Principles. ASU
2016-02
requires that a lessee should recognize a liability to make lease payments (the lease liability) and a
right-of-use
asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU
2016-02
requires expanded disclosures about the
nature and terms of lease agreements and is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. A modified retrospective transition
approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company currently anticipates early adoption of ASU
2016-02
effective April 29, 2018 in conjunction with the adoption of ASU
2014-09.
While the Companys ability to early adopt depends on system readiness and
completing the Companys analysis of information necessary to restate prior period consolidated financial statements, the Company remains on schedule and has implemented key system functionality to enable the preparation of restated financial
information. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements, but expects that it will result in a significant increase to its long-term assets and liabilities on its consolidated
balance sheet. However, the Company does not expect adoption will have a material impact on its consolidated statement of operations.
In
July 2015, the FASB issued ASU
2015-11,
Simplifying the Measurement of Inventory
(ASU
2015-11),
modifying the accounting for inventory. Under ASU
2015-11,
the measurement principle for inventory will change from lower of cost or market value to lower of cost and net realizable value. ASU
2015-11
defines net realizable
value as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU
2015-11
is applicable to inventory that is accounted
for under the
first-in,
first-out
method and is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years,
with early adoption permitted. The Company adopted ASU
18
2015-11
effective May 1, 2017. The majority of the Companys merchandise inventories are valued using the retail inventory method, which is
outside the scope of ASU
2015-11.
The remaining inventory of the Companys merchandise inventories are valued at the lower of cost and net realizable value using the average cost method. The Company
applied the amendments in this update prospectively to the measurement of inventory after the date of adoption with no material impact to the Companys consolidated financial statements.
In May 2014, the FASB issued ASU
2014-09.
The standard provides companies with a single model for use
in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or
services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. ASU
2014-09,
as amended by ASU
2015-14,
ASU
2016-08,
ASU
2016-10,
ASU
2016-12
and ASU
2016-20,
is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted for annual reporting periods
beginning after December 15, 2016. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. The
Company plans to adopt ASU
2014-09
effective April 29, 2018. The Company currently anticipates adopting the standard using the modified retrospective method. The Company has begun the process of
implementing this standard, including performing a review of its revenue streams to identify any differences in the timing, measurement, or presentation of revenue recognition. The Company currently believes that the primary impact will be changes
to the timing of recognition of revenues related to gift card breakage. The Company will continue to assess the impact on all areas of its revenue recognition, disclosure requirements and changes that may be necessary to its internal controls over
financial reporting. The Company is continuing to evaluate the impact of adopting this ASU on its consolidated financial statements. The Company remains on schedule to adopt this ASU effective April 29, 2018.