Unless the context otherwise indicates, references to "we," "us," "our" and "the Company" refer toBarnes & Noble Education, Inc. or "BNED", aDelaware corporation. References to "Barnes & Noble College " or "BNC" refer to our subsidiaryBarnes & Noble College Booksellers, LLC . References to "MBS" refer to our subsidiaryMBS Textbook Exchange, LLC . References to "Student Brands" refer to our subsidiaryStudent Brands, LLC . Our fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. "Fiscal 2021" means the 52 weeks endedMay 1, 2021 , "Fiscal 2020" means the 53 weeks endedMay 2, 2020 , and "Fiscal 2019" means the 52 weeks endedApril 27,2019 . Overview Description of businessBarnes & Noble Education, Inc. ("BNED") is one of the largest contract operators of physical and virtual bookstores for college and university campuses and K-12 institutions acrossthe United States . We are also one of the largest textbook wholesalers, inventory management hardware and software providers, and a leading provider of digital education solutions. We operate 1,417 physical, virtual, and custom bookstores and serve more than 6 million students, delivering essential educational content and tools within a dynamic omni channel retail environment. Additionally, we offer direct-to-student products and services to help students study more effectively and improve academic performance. The strengths of our business include our ability to compete by developing new products and solutions to meet market needs, our large operating footprint with direct access to students and faculty, our well-established, deep relationships with academic partners and stable, long-term contracts and our well-recognized brands. We expect to continue to introduce scalable and advanced digital solutions focused largely on the student, expand our e-commerce capabilities and accelerate such capabilities through our recentFanatics Partnership , increase market share with new accounts, and expand our strategic opportunities through acquisitions and partnerships. We expect general merchandise sales to increase over the long term, as our product assortments continue to emphasize and reflect changing consumer trends, and we evolve our presentation concepts and merchandising of products in stores and online, which we expect to be further enhanced and accelerated through our partnership withFanatics Retail Group Fulfillment, LLC, Inc. andFanatics Lids College, Inc. Through this partnership, we receive unparalleled product assortment, e-commerce capabilities and powerful digital marketing tools to drive increased value for customers and accelerate growth of our logo and emblematic general merchandise business. We believe the Barnes & Noble brand (licensed from our former parent) along with our subsidiary brands, BNC and MBS, are synonymous with innovation in bookselling and campus retailing, and are widely recognized and respected brands inthe United States . Our large college footprint, reputation, and credibility in the marketplace not only support our marketing efforts to universities, students, and faculty, but are also important to our relationship with leading publishers who rely on us as one of their primary distribution channels, and for being a trusted source for students in our direct-to-student digital solutions business. For a discussion of our business, see Part I - Item 1. Business. Partnership with Fanatics and FLC InDecember 2020 , we entered into a new merchandising partnership withFanatics Retail Group Fulfillment, LLC, Inc. ("Fanatics") andFanatics Lids College, Inc. ("FLC"). Through this partnership, we receive unparalleled product assortment, e-commerce capabilities and powerful digital marketing tools to drive increased value for customers and accelerate growth of our general merchandise business. Fanatics' cutting-edge e-commerce and technology expertise offers our campus stores expanded product selection, a world-class online and mobile experience, and a progressive direct-to-consumer platform. Coupled with FLC, the leading standalone brick and mortar retailer focused exclusively on licensed fan and alumni products, our campus stores have improved access to trend and sales performance data on licensees, product styles, and design treatments. We maintain our relationships with campus partners and remain responsible for staffing and managing the day-to-day operations of our campus bookstores. We also work closely with our campus partners to ensure that each campus store maintains unique aspects of in-store merchandising, including localized product assortments and specific styles and designs that reflect each campus's brand. We leverage Fanatics' e-commerce technology and expertise for the operational management of the emblematic merchandise and gift sections of our campus store websites. FLC manages in-store assortment planning and merchandising of emblematic apparel, headwear, and gift products for our partner campus stores. InDecember 2020 ,Fanatics, Inc. andLids Holdings, Inc. jointly made a strategic equity investment in BNED. OnApril 4, 2021 , as contemplated under the merchandising partnership agreement, FLC purchased our logo and emblematic general merchandise inventory. As the logo and emblematic general merchandise sales are fulfilled by FLC and Fanatics, we recognize 32 -------------------------------------------------------------------------------- Index to Form 10-K Index to FS commission revenue earned for these sales on a net basis. For additional information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies and Note 6. Equity and Earnings Per Share. COVID-19 Business Impact Our business experienced an unprecedented and significant impact as a result of COVID-19 related campus store closures. Beginning inMarch 2020 , colleges and universities nationwide began to close their campuses in light of safety concerns and as a result of local and state issued stay-at-home orders. By mid-March, during our Fiscal 2020 fourth quarter, we closed the majority of our physical campus stores to protect the health and safety of our customers and employees. While our campus stores were closed, we continued to serve institutions and students through our campus websites, providing free shipping on all orders and an expanded digital content offering to provide immediate access to course materials to students at our campuses that closed due to COVID-19. We developed and implemented plans to safely reopen our campus stores based on national, state and local guidelines, as well as the campus policies set by the school administration. Our Fiscal 2021 results have been significantly impacted by the ongoing COVID-19 pandemic, as many schools adjusted their learning model and on-campus activities in response to the pandemic. Fewer students returned to campus, as many schools implemented a remote learning model and curtailed on-campus classes and activities. While many athletic conferences resumed their sport activities, fan attendance at the games was either eliminated or severely restricted, which further impacted the company's general merchandise business. Additionally, sales were impacted by overall enrollment declines in higher education. See Part II - Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies - Other Long-Lived Assets related to the impairment loss (non-cash) recognized during Fiscal 2021. To mitigate the impact of the business disruption, we have taken steps to significantly reduce costs, including periodically furloughing the majority of our Retail workforce during non-rush seasonal sales periods. We have implemented a significant cost reduction program designed to streamline our operations, maximize productivity and drive profitability. Certain elements of this plan were implemented in late Fiscal 2020, while other actions occurred in Fiscal 2021. We have achieved meaningful annualized cost savings from this program. Despite the introduction of COVID-19 vaccines, the pandemic remains highly volatile and continues to evolve. We cannot accurately predict the duration or extent of the impact of COVID-19 on enrollments, university budgets, athletics and other areas that directly affect our business operations. Although most schools expect to return to a traditional on-campus environment for learning in the upcoming Fall semester, as well as host traditional on campus sporting activities, there is still uncertainty about the duration and extent of the impact of the COVID-19 pandemic. We will continue to assess our operations and will continue to consider the guidance of local governments and our campus partners to determine when our operations can begin returning to normal levels of business. If economic conditions caused by the pandemic do not recover as currently estimated by management or market factors currently in place change, there could be a further impact on our results of operations, financial condition and cash flows from operations. Segments We have three reportable segments: Retail, Wholesale and DSS. Additionally, unallocated shared-service costs, which include various corporate level expenses and other governance functions, continue to be presented as "Corporate Services". The following discussion provides information regarding the three segments. Retail Segment The Retail Segment operates 1,417 college, university, and K-12 school bookstores, comprised of 769 physical bookstores and 648 virtual bookstores. Our bookstores typically operate under agreements with the college, university, or K-12 schools to be the official bookstore and the exclusive seller of course materials and supplies, including physical and digital products. The majority of the physical campus bookstores have school-branded e-commerce sites which we operate independently or along with our merchant partners, and which offer students access to affordable course materials and affinity products, including emblematic apparel and gifts. The Retail Segment also offers inclusive access programs, in which course materials are offered at a reduced price through a fee charged by the institution or included in tuition, and delivered to students on or before the first day of class. Additionally, the Retail Segment offers a suite of digital content and services to colleges and universities, including a variety of open educational resource-based courseware. Wholesale Segment The Wholesale Segment is comprised of our wholesale textbook business and is one of the largest textbook wholesalers in the country. The Wholesale Segment centrally sources, sells, and distributes new and used textbooks to approximately 3,300 physical bookstores (including our Retail Segment's 769 physical bookstores) and sources and distributes new and used textbooks to our 648 virtual bookstores. Additionally, the Wholesale Segment sells hardware and a software suite of applications that provides inventory management and point-of-sale solutions to approximately 400 college bookstores. 33 -------------------------------------------------------------------------------- Index to Form 10-K Index to FS DSS Segment The Digital Student Solutions ("DSS") Segment includes direct-to-student products and services to assist students to study more effectively and improve academic performance. The DSS Segment is comprised of the operations ofStudent Brands, LLC , a leading direct-to-student subscription-based writing services business, and bartleby®, a direct-to-student subscription-based offering providing textbook solutions, expert questions and answers, writing and tutoring. Corporate Services represents unallocated shared-service costs which include corporate level expenses and other governance functions, including executive functions, such as accounting, legal, treasury, information technology, and human resources. Seasonality Our business is highly seasonal. Our quarterly results also may fluctuate depending on the timing of the start of the various schools' semesters, as well as shifts in our fiscal calendar dates. These shifts in timing may affect the comparability of our results across periods. Our fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. For our retail operations, sales are generally highest in the second and third fiscal quarters, when students generally purchase and rent textbooks and other course materials, and lowest in the first and fourth fiscal quarters. Sales attributable to our wholesale business are generally highest in our first, second and third quarter, as it sells textbooks and other course materials for retail distribution. For our DSS segment, or direct-to-student business, sales and operating profit are realized relatively consistently throughout the year. Trends and Other Factors Affecting Our Business For a discussion of our trends and other factors affecting our business, see Part I - Item 1. Business. Results of Operations Elements of Results of Operations Our consolidated financial statements reflect our consolidated financial position, results of operations and cash flows in conformity with accounting principles generally accepted inthe United States ("GAAP"). Our sales are primarily derived from the sale of course materials, which include new, used and digital textbooks, and at college and university bookstores which we operate, we sell high margin general merchandise, including emblematic apparel and gifts, trade books, computer products, school and dorm supplies, convenience and café items and graduation products. Our rental income is primarily derived from the rental of physical textbooks. We also derive revenue from other sources, such as sales of inventory management, hardware and point-of-sale software, direct-to-student subscription-based services, and other services. Our cost of sales primarily includes costs such as merchandise costs, textbook rental amortization, content development cost amortization, warehouse costs related to inventory management and order fulfillment, insurance, certain payroll costs, 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 long-term incentive plan compensation expense and general office expenses, such as merchandising, procurement, field support, finance and accounting, and operating costs related to our direct-to-student subscription-based services business. Shared-service costs such as human resources, legal, treasury, information technology, and various other corporate level expenses and other governance functions, are not allocated to any specific reporting segment and are recorded in Corporate Services as discussed in the Overview - Segments discussion above. Basis of Consolidation The results of operations reflected in our consolidated financial statements are presented on a consolidated basis. All material intercompany accounts and transactions have been eliminated in consolidation. 34 -------------------------------------------------------------------------------- Index to Form 10-K Index to FS Results of Operations - Summary Our Fiscal 2021 results have been significantly impacted by the ongoing COVID-19 pandemic, as many schools continued to adjust their learning model and on-campus activities in response to the pandemic. See "Overview" for more information. A detailed discussion of Fiscal 2019 items and year-over-year comparisons between Fiscal 2020 and Fiscal 2019 can be found in Part II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year endedMay 2, 2020 filed with theSEC onJuly 14, 2020 . 52 weeks ended 53 weeks ended 52 weeks ended Dollars in thousands May 1, 2021 May 2, 2020 April 27, 2019 Sales: (a) Product sales and other$ 1,299,740 $ 1,671,200 $ 1,838,760 Rental income 134,150 179,863 195,883 Total sales$ 1,433,890 $ 1,851,063 $ 2,034,643 Net loss$ (131,787) $ (38,250) $ (24,374) Adjusted Earnings (non-GAAP) (b)$ (89,033) $
(21,126)
Adjusted EBITDA (non-GAAP) (b) Retail$ (66,827) $ 36,227 $ 89,094 Wholesale 18,598 21,567 35,018 DSS 4,491 3,409 6,169 Corporate Services (22,079) (19,403) (24,873) Eliminations 192 359 (466) Total Adjusted EBITDA (non-GAAP)$ (65,625) $
42,159
(a)In Fiscal 2021 and Fiscal 2020, our business experienced an unprecedented and significant impact as a result of the COVID-19 pandemic. The impact of which affects the comparability of our results of operations and cash flows. (b)Adjusted Earnings and Adjusted EBITDA are a non-GAAP financial measures. See Adjusted Earnings (non-GAAP) and Adjusted EBITDA (non-GAAP) discussion below.
The following table sets forth, for the periods indicated, the percentage relationship that certain items bear to total sales:
52 weeks ended 53 weeks ended 52 weeks ended May 1, 2021 May 2, 2020 April 27, 2019 Sales: Product sales and other 90.6 % 90.3 % 90.4 % Rental income 9.4 9.7 9.6 Total sales 100.0 100.0 100.0 Cost of sales: Product and other cost of sales (a) 84.2 78.0 75.9 Rental cost of sales (a) 65.0 58.3 57.0 Total cost of sales 82.4 76.1 74.1 Gross margin 17.6 23.9 25.9 Selling and administrative expenses 23.6 21.9 20.8 Depreciation and amortization expense 3.7 3.3 3.2 Impairment loss (non-cash) 1.9 - 2.8 Restructuring and other charges 0.7 1.0 0.4 Operating loss (12.3) % (2.3) % (1.4) %
(a) Represents the percentage these costs bear to the related sales, instead of total sales.
35 -------------------------------------------------------------------------------- Index to Form 10-K Index to FS Results of Operations - 52 weeks endedMay 1, 2021 compared with the 53 weeks endedMay 2, 2020
52 weeks ended,
Corporate Dollars in thousands Retail Wholesale DSS Services Eliminations (b) Total Sales: Product sales and other$ 1,196,320 $ 165,825 $ 27,374 $ - $ (89,779)$ 1,299,740 Rental income 134,150 - - - - 134,150 Total sales 1,330,470 165,825 27,374 - (89,779) 1,433,890 Cost of sales: Product and other cost of sales 1,047,613 131,142 5,056 - (89,822) 1,093,989 Rental cost of sales 87,240 - - - - 87,240 Total cost of sales 1,134,853 131,142 5,056 - (89,822) 1,181,229 Gross profit 195,617 34,683 22,318 - 43 252,661 Selling and administrative expenses 278,149 16,085 22,116 22,079 (149) 338,280 Depreciation and amortization expense 39,634 5,461 7,763 109 - 52,967 Sub-Total:$ (122,166) $ 13,137 $ (7,561) $ (22,188) $ 192 (138,586) Impairment loss (non-cash) 27,630 Restructuring and other charges 9,960 Operating loss$ (176,176)
53 weeks ended,
Corporate Dollars in thousands Retail Wholesale DSS Services Eliminations (b) Total Sales: Product sales and other$ 1,533,029 $ 198,353 $ 23,661 $ - $ (83,843) 1,671,200 Rental income 179,863 - - - - 179,863 Total sales 1,712,892 198,353 23,661 - (83,843) 1,851,063 Cost of sales: Product and other cost of sales 1,224,798 158,548 4,348 - (83,992) 1,303,702 Rental cost of sales 104,812 - - - - 104,812 Total cost of sales 1,329,610 158,548 4,348 - (83,992) 1,408,514 Gross profit 383,282 39,805 19,313 - 149 442,549 Selling and administrative expenses 347,869 18,238 19,172 19,403 (210) 404,472 Depreciation and amortization expense 47,099 5,963 8,670 128 - 61,860 Sub-Total:$ (11,686) $ 15,604 $ (8,529) $ (19,531) $ 359 (23,783) Impairment loss (non-cash) 433 Restructuring and other charges 18,567 Operating loss$ (42,783) (a) In Fiscal 2021 and Fiscal 2020, our business experienced an unprecedented and significant impact as a result of the COVID-19 pandemic. The impact of which affects the comparability of our results of operations and cash flows. (b) For additional information related to the intercompany activities and eliminations, see Part II - Item 8. Financial Statements and Supplementary Data - Note 5. Segment Reporting. 36 -------------------------------------------------------------------------------- Index to Form 10-K Index to FS Sales The following table summarizes our sales: 52 weeks ended 53 weeks ended Dollars in thousands May 1, 2021 May 2, 2020 % Product sales and other 1,299,740 1,671,200 (22.2)% Rental income 134,150 179,863 (25.4)% Total Sales$ 1,433,890 $ 1,851,063 (22.5)% Our total sales decreased by$417.2 million , or 22.5%, to$1,433.9 million during the 52 weeks endedMay 1, 2021 from$1,851.1 million during the 53 weeks endedMay 2, 2020 . The sales decrease is primarily related to the impact of the additional week for Fiscal 2020, the impact from temporary store closings related to COVID-19 earlier in the fiscal year, as well as lower in store foot traffic, lower enrollments and fewer on-campus events due to COVID-19. The components of the variances are reflected in the table below. Sales variances 52 weeks ended May 1, Dollars in millions 2021 Retail Sales New stores $ 64.2 Closed stores (35.4) Comparable stores (a) (409.2) Textbook rental deferral (3.3) Service revenue (b) (0.7) Other (c) 2.0 Retail Sales subtotal:$ (382.4) Wholesale Sales $ (32.5) DSS Sales $ 3.7 Eliminations (d) $ (6.0) Total sales variance$ (417.2) (a) Comparable store sales includes sales from physical stores that have been open for an entire fiscal year period and virtual store sales for the period, does not include sales from closed stores for all periods presented. Sales for logo and emblematic general merchandise fulfilled by FLC inventory and digital agency sales are included on a gross basis. (b) Service revenue includes brand partnerships, shipping and handling, and revenue from other programs. (c) Other includes inventory liquidation sales to third parties, marketplace sales and certain accounting adjusting items related to return reserves, and other deferred items. (d) Eliminates Wholesale sales and service fees to Retail and Retail commissions earned from Wholesale. See discussion of intercompany activities and eliminations below. Retail Retail total sales decreased by$382.4 million , or 22.3%, to$1,330.5 million during the 52 weeks endedMay 1, 2021 from$1,712.9 million during the 53 weeks endedMay 2, 2020 . Retail added 98 new stores and closed 100 stores (not including temporary store closings due to COVID-19) during the 52 weeks endedMay 1, 2021 , ending the period with a total of 1,417 stores. Fiscal 2021 Fiscal 2020 Physical Virtual Physical Virtual Number of stores at beginning of period 772 647 772 676 Opened 40 58 50 71 Closed 43 57 50 100 Number of stores at end of period 769 648 772 647 37 -------------------------------------------------------------------------------- Index to Form 10-K Index to FS Product and other sales for Retail decreased by$336.7 million , or 22.0%, to$1,196.3 million during the 52 weeks endedMay 1, 2021 from$1,533.0 million during the 53 weeks endedMay 2, 2020 . Product and other sales are impacted by comparable store sales (as noted in the chart below), new store openings and store closings, as well as the impact from the COVID-19 pandemic. Sales were impacted by the temporary store closings due to COVID-19 earlier in the fiscal year, as well as the impact of fewer students returning to campus, as many schools implemented a remote learning model and curtailed on-campus classes and activities. While many big-conferences resumed their sport activities, fan attendance at the games was either eliminated or severely restricted, which further impacted the company's high-margin general merchandise business. Additionally, sales were impacted by overall enrollment declines in higher education. Textbook (Course Materials) revenue for Retail decreased primarily due to lower new and used textbook and other course materials sales, while First Day (our inclusive access program), digital and eTextbook revenue increased. EffectiveApril 4, 2021 , as per the FLC merchandising partnership agreement, logo and emblematic general merchandise sales were fulfilled by FLC and we recognized commission revenue earned for these sales on a net basis. Additionally, general merchandise sales for Retail decreased primarily due to lower emblematic apparel sales (as many athletic events were canceled due to COVID-19), lower supply product sales and lower graduation product sales (primarily due to COVID-19 related campus closures). We have made continued progress in the development of our next generation e-commerce platform, which launched in Fiscal 2021 to deliver increased high-margin general merchandise sales. Rental income for Retail decreased by$45.7 million , or 25.4%, to$134.2 million during the 52 weeks endedMay 1, 2021 from$179.9 million during the 53 weeks endedMay 2, 2020 . Rental income is impacted by comparable store sales, new store openings and store closings. The decrease in rental income is primarily due to decreased rental activity due to the COVID-19 pandemic as discussed above and the impact of increased digital offerings. Comparable store sales for Retail decreased for the 52 week sales period. Comparable store sales were impacted primarily by COVID-19 related campus temporary store closures, lower enrollment and on-campus events (all discussed above), a shift to lower cost options and more affordable solutions, including digital offerings, increased consumer purchases directly from publishers and other online providers, lower general merchandise sales (including graduation products and logo products for athletic events). These decreases were partially offset by increased First Day, digital and eTextbook revenue. Comparable store sales variances for Retail by category for the 52 week period is as follows: Comparable Store Sales variances for Retail (a) 52 weeks ended Dollars in millions May 1, 2021 Textbooks (Course Materials)$ (158.4) (15.2) % General Merchandise (235.3) (45.9) % Trade Books (20.9) (64.3) % Total Comparable Store Sales$ (414.6) (26.1) % (a) Comparable sales data exclude the impact of the additional week for Fiscal 2020. Comparable store sales includes sales from physical stores that have been open for an entire fiscal year period and virtual store sales for the period, does not include sales from closed stores for all periods presented. Sales for logo and emblematic general merchandise fulfilled by FLC inventory and digital agency sales are included on a gross basis. We believe the current comparable store sales calculation method reflects the manner in which management views comparable sales, as well as the seasonal nature of our business. Wholesale Wholesale sales decreased by$32.5 million , or 16.4%, to$165.8 million during the 52 weeks endedMay 1, 2021 from$198.3 million during the 53 weeks endedMay 2, 2020 . The decrease is primarily due to decreased gross sales impacted by the COVID-19 pandemic, a decrease in customer demand resulting from a shift in buying patterns from physical textbooks to digital products, and lower demand from other third-party clients, partially offset by a lower returns and allowances. DSS DSS total sales increased by$3.7 million , or 15.7%, to$27.4 million during the 52 weeks endedMay 1, 2021 from$23.7 million during the 53 weeks endedMay 2, 2020 , primarily due to higher bartleby subscription sales, which were partially offset by lower Student Brands sales. Cost of Sales and Gross Margin Our cost of sales increased as a percentage of sales to 82.4% during the 52 weeks endedMay 1, 2021 compared to 76.1% during the 53 weeks endedMay 2, 2020 . Our gross margin decreased by$189.9 million , or 42.9%, to$252.7 million , or 17.6% of sales, during the 52 weeks endedMay 1, 2021 from$442.5 million , or 23.9% of sales, during the 53 weeks endedMay 2, 2020 . 38 -------------------------------------------------------------------------------- Index to Form 10-K Index to FS During the 52 weeks endedMay 1, 2021 , we recognized a merchandise inventory loss and write-off of$15.0 million in cost of goods sold in the Retail Segment discussed below. Excluding the merchandise inventory loss and write-off, cost of goods sold and gross margin was 81.3% and 18.7%, respectively, of sales during the 52 weeks endedMay 1, 2021 compared to 76.1% and 23.9%, respectively, of sales during the 53 weeks endedMay 2, 2020 . For additional information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 1. Organization and Note 2. Summary of Significant Accounting Policies - Merchandise Inventories. Retail The following table summarizes the Retail cost of sales: 52 weeks ended 53 weeks ended May 1, % of May 2, % of Dollars in thousands 2021 Related Sales 2020 Related Sales Product and other cost of sales$ 1,047,612 87.6%$ 1,224,798 79.9% Rental cost of sales 87,240 65.0% 104,812 58.3% Total Cost of Sales$ 1,134,852 85.3%$ 1,329,610 77.6%
The following table summarizes the Retail gross margin:
52 weeks ended 53 weeks ended May 1, % of May 2, % of Dollars in thousands 2021 Related Sales 2020 Related Sales Product and other gross margin$ 148,708 12.4%$ 308,231 20.1% Rental gross margin 46,910 35.0% 75,051 41.7% Gross Margin$ 195,618 14.7%$ 383,282 22.4% For the 52 weeks endedMay 1, 2021 , the Retail gross margin as a percentage of sales decreased as discussed below: •Product and other gross margin decreased (770 basis points), driven primarily by lower margin rates (435 basis points) due to higher markdowns, an unfavorable sales mix (370 basis points) due to lower high-margin general merchandise sales of approximately$231.2 million and the shift to lower margin digital courseware, and a merchandise inventory loss and write-off (100 basis points) of$15.0 million , comprised of a loss of$10.3 million related to the sale of our logo and emblematic general merchandise inventory below cost to FLC and an inventory write-off of$4.7 million related to our initiative to exit certain product offerings and streamline/rationalize our overall non-logo general merchandise product assortment resulting from the centralization of our merchandising decision-making during the year, partially offset by higher contract costs as a percentage of sales related to our college and university contracts (130 basis points) resulting from contract renewals and new store contracts. •Rental gross margin decreased (670 basis points), driven primarily by higher contract costs as a percentage of sales related to our college and university contracts (620 basis points) and unfavorable rental mix (80 basis points), partially offset by higher rental margin rates (30 basis points). Wholesale The cost of sales and gross margin for Wholesale were$131.1 million , or 79.1% of sales, and$34.7 million , or 20.9% of sales, respectively, during the 52 weeks endedMay 1, 2021 . The cost of sales and gross margin for Wholesale were$158.5 million , or 79.9% of sales, and$39.8 million , or 20.1% of sales, respectively, during the 53 weeks endedMay 2, 2020 . The gross margin increased to 20.9% during the 52 weeks endedMay 1, 2021 from 20.1% during the 53 weeks endedMay 2, 2020 . The increase was primarily due to the favorable impact of returns and allowances and lower markdowns, partially offset by an unfavorable sales mix. DSS Gross margin for the DSS segment was$22.3 million , or 81.5% of sales, during the 52 weeks endedMay 1, 2021 and$19.3 million , or 81.6% of sales, during the 53 weeks endedMay 2, 2020 . The increase in gross margin was primarily due to higher bartleby subscription sales. Intercompany Eliminations During the 52 weeks endedMay 1, 2021 and 53 weeks endedMay 2, 2020 , sales eliminations were$89.8 million and$83.9 million , respectively. These sales eliminations represent the elimination of Wholesale sales and fulfillment service fees to Retail and the elimination of Retail commissions earned from Wholesale. 39 -------------------------------------------------------------------------------- Index to Form 10-K Index to FS During the 52 weeks endedMay 1, 2021 and 53 weeks endedMay 2, 2020 , the cost of sales eliminations were$89.8 million and$84.0 million , respectively. These cost of sales eliminations represent (i) the recognition of intercompany profit for Retail inventory that was purchased from Wholesale in a prior period that was subsequently sold to external customers during the current period and the elimination of Wholesale service fees charged for fulfillment of inventory for virtual store sales, net of (ii) the elimination of intercompany profit for Wholesale inventory purchases by Retail that remain in ending inventory at the end of the current period. The$0.1 million of gross margin elimination reflects the net impact of the sales eliminations and cost of sales eliminations during both the 52 weeks endedMay 1, 2021 and 53 weeks endedMay 2, 2020 , respectively. The gross margin eliminations reflect the net impact of the sales eliminations and cost of sales eliminations during the above mentioned reporting periods. Selling and Administrative Expenses 52 weeks ended 53 weeks ended May 1, % of May 2, % of Dollars in thousands 2021 Sales 2020 Sales Selling and Administrative Expenses$ 338,280 23.6%$ 404,472
21.9%
During the 52 weeks endedMay 1, 2021 , selling and administrative expenses decreased by$66.2 million , or 16.4%, to$338.3 million from$404.5 million during the 53 weeks endedMay 2, 2020 . The variances by segment are as follows: Retail For Retail, selling and administrative expenses decreased by$69.7 million , or 20.0%, to$278.2 million during the 52 weeks endedMay 1, 2021 from$347.9 million during the 53 weeks endedMay 2, 2020 . This decrease was primarily due to a$59.3 million decrease in stores payroll and operating expenses, including comparable stores, primarily due to temporary furloughed store employees, lower virtual stores and new/closed stores payroll and operating expenses, and a decrease of$10.4 million in corporate payroll, infrastructure costs, product development costs and digital operations costs. Wholesale For Wholesale, selling and administrative expenses decreased by$2.1 million , or 11.8%, to$16.1 million during the 52 weeks endedMay 1, 2021 from$18.2 million during the 53 weeks endedMay 2, 2020 . The decrease in selling and administrative expenses was primarily driven by lower payroll and operating costs. DSS For DSS, selling and administrative expenses increased by$2.9 million to$22.1 million during the 52 weeks endedMay 1, 2021 from$19.2 million during the 53 weeks endedMay 2, 2020 . The increase in costs was primarily driven by an increase in payroll costs, higher professional services and advertising costs. Corporate Services Corporate Services' selling and administrative expenses increased by$2.7 million , or 13.8%, to$22.1 million during the 52 weeks endedMay 1, 2021 from$19.4 million during the 53 weeks endedMay 2, 2020 . The increase was primarily due to higher compensation-related expenses and higher operating expenses. Depreciation and Amortization Expense 52 weeks ended 53 weeks ended May 1, % of May 2, % of Dollars in thousands 2021 Sales 2020 Sales Depreciation and Amortization Expense$ 52,967 3.7%$ 61,860 3.3% Depreciation and amortization expense decreased by$8.9 million , or 14.4%, to$53.0 million during the 52 weeks endedMay 1, 2021 from$61.9 million during the 53 weeks endedMay 2, 2020 . The decrease was primarily attributable to lower depreciable assets and intangibles due to the store impairment loss recognized during the third quarter of Fiscal 2021. See impairment loss discuss below. Impairment loss (non-cash) We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets. For information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies and Note 7. Fair Value Measurements. 40 -------------------------------------------------------------------------------- Index to Form 10-K Index to FS During the 52 weeks endedMay 1, 2021 , we evaluated certain of our store-level long-lived assets in the Retail segment for impairment. Based on the results of the impairment tests, we recognized an impairment loss (non-cash) of$27.6 million ,$20.5 million after-tax, comprised of$5.1 million ,$13.3 million ,$6.3 million and$2.9 million of property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets, respectively. During the 53 weeks endedMay 2, 2020 , we recognized an impairment loss (non-cash) of$0.4 million in the Retail segment related to net capitalized development costs for a project which are not recoverable. Restructuring and other charges During the 52 weeks endedMay 1, 2021 , we recognized restructuring and other charges totaling$10.0 million , comprised primarily of$5.9 million for severance and other employee termination and benefit costs associated with elimination of various positions as part of cost reduction objectives,$5.2 million for professional service costs related to restructuring, process improvements, the financial advisor strategic review process, costs related to development and integration associated with Fanatics and FLC partnership agreements and shareholder activist activities, and$0.5 million related to liabilities for a facility closure, partially offset by a$1.6 million in an actuarial gain related to a frozen retirement benefit plan (non-cash). During the 53 weeks endedMay 2, 2020 , we recognized restructuring and other charges totaling$18.6 million comprised primarily of$12.7 million for severance and other employee termination and benefit costs associated with several management changes, the elimination of various positions as part of cost reduction objectives, and professional service costs for process improvements,$2.8 million for professional service costs for shareholder activist activities,$2.7 million in an actuarial loss related to a frozen retirement benefit plan (non-cash), and$0.6 million for a store level asset impairment charge, offset by$0.2 million related to reduction of liabilities for a facility closure. Operating Loss 52 weeks ended 53 weeks ended May 1, % of May 2, % of Dollars in thousands 2021 Sales 2020 Sales Operating Loss $
(176,176) (12.3)%
Our operating loss was$(176.2) million during the 53 weeks endedMay 1, 2021 compared to operating loss of$(42.8) million during the 53 weeks endedMay 2, 2020 . This operating loss increase was due to the matters discussed above. For the 52 weeks endedMay 1, 2021 , excluding the$15.0 million of merchandise inventory loss and write-off,$10.0 million of restructuring and other charges and the$27.6 million impairment loss (non-cash), all discussed above, operating loss was$(123.6) million (or (8.6)% of sales). For the 53 weeks endedMay 2, 2020 , excluding the$18.6 million of restructuring and other charges and the$0.4 million impairment loss, all discussed above, operating loss was$(23.8) million (or (1.3)% of sales). Interest Expense, Net 52 weeks ended 53 weeks ended Dollars in thousands May 1, 2021 May 2, 2020 Interest Expense, Net$ 8,087 $ 7,445 Net interest expense increased by$0.6 million to$8.1 million during the 52 weeks endedMay 1, 2021 from$7.4 million during the 53 weeks endedMay 2, 2020 primarily due to higher average borrowings. Income Tax Benefit 52 weeks ended 53 weeks ended May 1, May 2, Dollars in thousands 2021 Effective Rate 2020 Effective Rate Income Tax Benefit$ (52,476) 28.5%$ (11,978) 23.8% We recorded an income tax benefit of$(52.5) million on a pre-tax loss of$(184.3) million during the 52 weeks endedMay 1, 2021 , which represented an effective income tax rate of 28.5% and an income tax benefit of$(12.0) million on a pre-tax loss of$(50.2) million during the 53 weeks endedMay 2, 2020 , which represented an effective income tax rate of 23.8%. The effective tax rate for the 52 weeks endedMay 1, 2021 is higher as compared to the comparable prior year period due to various permanent differences and the impact of the CARES Act. 41 -------------------------------------------------------------------------------- Index to Form 10-K Index to FS Impact ofU.S. Tax Reform The Tax Cuts and Jobs Act (the "Act") was enacted onDecember 22, 2017 . The Act reduces theU.S. federal corporate income tax rate from 35% to 21% and requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, among other provisions. In accordance withSAB 118, "Income Tax Accounting Implications of the Tax Cuts and Jobs Act" (SAB 118), we completed our accounting for the tax effects of the enactment of the Act within the provisional period as ofApril 27, 2019 . We recorded measurement period adjustments during Fiscal 2019 to reduce our net deferred tax liability by$3.9 million , which primarily relates to the acceleration of certain deductions as permitted by theU.S. tax code. The most significant impact of the legislation for the Company was a$20.4 million reduction of the value of our net deferred (which represents future tax liabilities) and long-term tax liabilities as a result of lowering theU.S. corporate income tax rate from 35% to 21%, which was recorded in Fiscal 2018. We also recorded a liability associated with the one-time transition tax. This amount is not material. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act (The "CARES Act") was enacted. We have analyzed the provisions, which provide for a technical correction to allow for full expensing of qualified leasehold improvements, modifications to charitable contribution and net operating loss limitations ("NOLs"), modifications to the deductibility of business interest expense, as well as Alternative Minimum Tax ("AMT") credit acceleration. The most significant impact of the legislation for the Company was an income tax benefit of$7.2 million for the carryback of NOLs to higher tax rate years, recorded in Fiscal 2021. As ofMay 1, 2021 , we recognized a current income tax receivable for NOL carrybacks of$30.5 million in prepaid and other current assets on the consolidated balance sheet. Net Loss 52 weeks ended 53 weeks ended Dollars in thousands May 1, 2021 May 2, 2020 Net Loss$ (131,787) $ (38,250) As a result of the factors discussed above, we reported a net loss of$(131.8) million during the 52 weeks endedMay 1, 2021 , compared with a net loss of$(38.3) million during the 53 weeks endedMay 2, 2020 . Adjusted Earnings (non-GAAP) is$(89.0) million during the 52 weeks endedMay 1, 2021 , compared with$(21.1) million during the 53 weeks endedMay 2, 2020 . See Adjusted Earnings (non-GAAP) discussion below. Non-GAAP Measures - Adjusted Earnings, Adjusted EBITDA and Free Cash Flow To supplement our results prepared in accordance with generally accepted accounting principles ("GAAP"), we use the measure of Adjusted Earnings, Adjusted EBITDA, and Free Cash Flow, which are non-GAAP financial measures underSecurities and Exchange Commission (the "SEC") regulations. We define Adjusted Earnings as net income adjusted for certain reconciling items that are subtracted from or added to net income. We define Adjusted EBITDA as net income plus (1) depreciation and amortization; (2) interest expense and (3) income taxes, (4) as adjusted for items that are subtracted from or added to net income. We define Free Cash Flow as Adjusted EBITDA less capital expenditures, cash interest and cash taxes. To properly and prudently evaluate our business, we encourage you to review our consolidated financial statements included elsewhere in this Form 10-K, the reconciliation of Adjusted Earnings to net income and the reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure presented in accordance with GAAP, set forth in the tables below. All of the items included in the reconciliations below are either (i) non-cash items or (ii) items that management does not consider in assessing our on-going operating performance. These non-GAAP financial measures are not intended as substitutes for and should not be considered superior to measures of financial performance prepared in accordance with GAAP. In addition, our use of these non-GAAP financial measures may be different from similarly named measures used by other companies, limiting their usefulness for comparison purposes. We review these non-GAAP financial measures as internal measures to evaluate our performance and manage our operations. We believe that these measures are useful performance measures which are used by us to facilitate a comparison of our on-going operating performance on a consistent basis from period-to-period. We believe that these non-GAAP financial measures provide for a more complete understanding of factors and trends affecting our business than measures under GAAP can provide alone, as they exclude certain items that do not reflect the ordinary earnings of our operations. Our Board of Directors and management also use Adjusted EBITDA as one of the primary methods for planning and forecasting overall expected performance, for evaluating on a quarterly and annual basis actual results against such expectations, and as a measure for performance incentive plans. We believe that the inclusion of Adjusted Earnings and Adjusted EBITDA results provides investors useful and important information regarding our operating results. We believe that Free Cash Flow provides useful additional information concerning cash flow available to meet future debt service obligations and working capital requirements and assists investors in their understanding of our operating profitability and liquidity as we manage the business to maximize margin and cash flow. 42 -------------------------------------------------------------------------------- Index to Form 10-K Index to FS Adjusted Earnings (non-GAAP) 52 weeks ended 53 weeks ended 52 weeks ended Dollars in thousands May 1, 2021 May 2, 2020 April 27, 2019 Net loss (a) $
(131,787)
42,754 17,124 49,786 Adjusted Earnings (non-GAAP) $
(89,033)
Reconciling items, pre-tax Impairment loss (non-cash) (b)$ 27,630 $ 433$ 57,748 Merchandise inventory loss and write-off (c) 14,960 - - Content amortization (non-cash) (d) 5,034 4,082 1,096 Restructuring and other charges (e) 9,960 18,567 7,233 Transaction costs (f) - - 654 Reconciling items, pre-tax 57,584 23,082 66,731 Less: Pro forma income tax impact (g) 14,830 5,958 16,945 Reconciling items, after-tax $
42,754
Adjusted EBITDA (non-GAAP) 52 weeks ended 53 weeks ended 52 weeks ended Dollars in thousands May 1, 2021 May 2, 2020 April 27, 2019 Net loss (a)$ (131,787) $ (38,250) $ (24,374) Add: Depreciation and amortization expense 52,967 61,860 65,865 Interest expense, net 8,087 7,445 9,780 Income tax benefit (52,476) (11,978) (13,060) Impairment loss (non-cash) (b) 27,630 433 57,748 Merchandise inventory loss and write-off (c) 14,960 - - Content amortization (non-cash) (d) 5,034 4,082 1,096 Restructuring and other charges (e) 9,960 18,567 7,233 Transaction costs (f) - - 654 Adjusted EBITDA (non-GAAP)$ (65,625) $ 42,159 $ 104,942 (a) In Fiscal 2021 and Fiscal 2020, our business experienced an unprecedented and significant impact as a result of the COVID-19 pandemic. The impact of which affects the comparability of our results of operations and cash flows. (b) See Management Discussion and Analysis - Results of Operations - Impairment Loss discussion above. (c) See Management Discussion and Analysis - Results of Operations - Cost of Sales and Margin discussion above. (d) Earnings are adjusted for amortization expense (non-cash) related to content development costs which are included in cost of goods sold. (e) See Management Discussion and Analysis - Restructuring and Other Charges discussion above. (f) Transaction costs are costs incurred for business development and acquisitions. (g) Represents the income tax effects of the non-GAAP items. The following is Adjusted EBITDA by segment for Fiscal 2021, Fiscal 2020, and Fiscal 2019. Adjusted EBITDA - by Segment
52 weeks ended
Corporate Total Dollars in thousands Retail Wholesale DSS Services Eliminations Fiscal 2021 Sales$ 1,330,470 $ 165,825 $ 27,374 $ -$ (89,779) $ 1,433,890 Cost of sales (b) (1,119,148) (131,142) (767) - 89,822 (1,161,235) Gross profit 211,322 34,683 26,607 - 43 272,655 Selling and administrative expenses 278,149 16,085 22,116 22,079 (149) 338,280 Adjusted EBITDA (non-GAAP)$ (66,827) $ 18,598 $ 4,491 $ (22,079) $ 192$ (65,625) 43
-------------------------------------------------------------------------------- Index to Form 10-K Index to FS Adjusted EBITDA - by Segment
53 weeks ended
Corporate Total Dollars in thousands Retail Wholesale DSS Services Eliminations Fiscal 2020 Sales$ 1,712,892 $ 198,353 $ 23,661 $ -$ (83,843) $ 1,851,063 Cost of sales (c) (1,328,796) (158,548) (1,080) - 83,992 (1,404,432) Gross profit 384,096 39,805 22,581 - 149 446,631 Selling and administrative expenses 347,869 18,238 19,172 19,403 (210) 404,472 Adjusted EBITDA (non-GAAP)$ 36,227 $ 21,567 $ 3,409 $ (19,403) $ 359$ 42,159 Adjusted EBITDA - by Segment
52 weeks ended
Corporate Total Dollars in thousands Retail Wholesale DSS Services Eliminations Fiscal 2019 Sales$ 1,889,008 $ 223,374 $ 21,339 $ -$ (99,078) $ 2,034,643 Cost of sales (d) (1,436,684) (167,033) (666) - 98,562 (1,505,821) Gross profit 452,324 56,341 20,673 - (516) 528,822 Selling and administrative expenses 363,230 21,323 14,504 24,873 (50) 423,880
Adjusted EBITDA (non-GAAP)
(a) In Fiscal 2021 and Fiscal 2020, our business experienced an unprecedented and significant impact as a result of the COVID-19 pandemic. The impact of which affects the comparability of our results of operations and cash flows. (b) For the 52 weeks endedMay 1, 2021 , gross margin excludes$0.7 million and$4.3 million of amortization expense (non-cash) related to content development costs in the Retail Segment and DSS Segment, respectively. For the 52 weeks endedMay 1, 2021 , gross margin also excludes a merchandise inventory loss and write-off of$15.0 million in the Retail Segment. See Management Discussion and Analysis - Results of Operations - Cost of Sales and Margin discussion above. (c) For the 53 weeks endedMay 2, 2020 , gross margin excludes$0.8 million and$3.7 million of amortization expense (non-cash) related to content development costs in the Retail Segment and DSS Segment, respectively. (d) For the 52 weeks endedApril 27, 2019 , gross margin excludes$0.5 million and$0.6 million of amortization expense (non-cash) related to content development costs in the Retail Segment and DSS Segment, respectively. Free Cash Flow (non-GAAP) 52 weeks ended 53 weeks ended 52 weeks ended Dollars in thousands May 1, 2021 May 2, 2020 April 27, 2019 Adjusted EBITDA (non-GAAP)$ (65,625) $ 42,159 $ 104,942 Less: Capital expenditures (a) 37,223 36,192 46,420 Cash interest 6,778 6,796 8,589 Cash taxes 6,008 (4,141) 10,277 Free Cash Flow (non-GAAP)$ (115,634) $ 3,312$ 39,656 (a) Purchases of property and equipment are also referred to as capital expenditures. Our investing activities consist principally of capital expenditures for contractual capital investments associated with renewing existing contracts, new store construction, digital initiatives and enhancements to internal systems and our website. The following table provides the components of total purchases of property and equipment: Capital Expenditures 52 weeks ended 53 weeks ended 52 weeks ended Dollars in thousands May 1, 2021 May 2, 2020 April 27, 2019 Physical store capital expenditures$ 10,382 $ 13,926 $ 19,362 Product and system development 11,747 15,710 13,581 Content development costs 8,741 4,335 11,509 Other 6,353 2,221 1,968 Total Capital Expenditures$ 37,223 $ 36,192 $ 46,420 44
-------------------------------------------------------------------------------- Index to Form 10-K Index to FS Liquidity and Capital Resources Our primary sources of cash are net cash flows from operating activities, funds available under a credit agreement and short-term vendor financing. As ofMay 1, 2021 , we had$177.6 million of borrowings outstanding under the Credit Agreement. See Financing Arrangements discussion below. We believe that our future cash from operations, access to borrowings under the Credit Facility, FILO Facility and short-term vendor financing will provide adequate resources to fund our operating and financing needs for the foreseeable future. Our future capital requirements will depend on many factors, including, but not limited to, the economy and the outlook for and pace of sustainable growth in our markets, the levels at which we maintain inventory, the number and timing of new store openings, and any potential acquisitions of other brands or companies including digital properties. To the extent that available funds are insufficient to fund our future activities, we may need to raise additional funds through public or private financing of debt or equity. Our access to, and the availability of, financing in the future will be impacted by many factors, including the liquidity of the overall capital markets and the current state of the economy. There can be no assurances that we will have access to capital markets on acceptable terms. COVID-19 Business Impact Our Fiscal 2021 results have been significantly impacted by the ongoing COVID-19 pandemic, as many schools adjusted their learning model and on-campus activities in response to the pandemic. Fewer students returned to campus, as many schools implemented a remote learning model and curtailed on-campus classes and activities. While many athletic conferences resumed their sport activities, fan attendance at the games was either eliminated or severely restricted, which further impacted the company's general merchandise business. Additionally, sales were impacted by overall enrollment declines in higher education. See Part II - Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies - Other Long-Lived Assets related to the impairment loss (non-cash) recognized during Fiscal 2021. To mitigate the impact of the business disruption, we have taken steps to significantly reduce costs, including periodically furloughing the majority of our Retail workforce during non-rush seasonal sales periods. We have implemented a significant cost reduction program designed to streamline our operations, maximize productivity and drive profitability. Certain elements of this plan were implemented in late Fiscal 2020, while other actions occurred in Fiscal 2021. We have achieved meaningful annualized cost savings from this program. Despite the introduction of COVID-19 vaccines, the pandemic remains highly volatile and continues to evolve. We cannot accurately predict the duration or extent of the impact of COVID-19 on enrollments, university budgets, athletics and other areas that directly affect our business operations. Although most schools expect to return to a traditional on-campus environment for learning in the upcoming Fall semester, as well as host traditional on campus sporting activities, there is still uncertainty about the duration and extent of the impact of the COVID-19 pandemic. We will continue to assess our operations and will continue to consider the guidance of local governments and our campus partners to determine when our operations can begin returning to normal levels of business. If economic conditions caused by the pandemic do not recover as currently estimated by management or market factors currently in place change, there could be a further impact on our results of operations, financial condition and cash flows from operations. Sale of Treasury Shares and Merchandise Inventory InDecember 2020 , we entered into a new merchandising partnership with Fanatics and FLC which included a strategic equity investment in the Company.Fanatics, Inc. andLids Holdings, Inc. jointly purchased an aggregate 2,307,692 of our common shares (issued from treasury shares) for$15.0 million , representing a share price of$6.50 per share. The premium price paid above the fair market value of our common stock at closing was approximately$4.1 million and was recognized as a contract liability ($0.2 million in accrued liabilities and$3.9 million in other long-term liabilities on our consolidated balance sheet) which is expected to be earned over the term of the merchandising contracts for Fanatics and FLC. OnApril 4, 2021 , as contemplated by the merchandising partnership agreement, we closed on the sale of our logo and emblematic general merchandise inventory to FLC and received proceeds of$41.8 million , and recognized a merchandise inventory loss on the sale of$10.3 million in cost of goods sold during the 52 weeks endedMay 1, 2021 in the statement of operations for the Retail Segment. The final inventory purchase price will be determined during the first quarter of Fiscal 2022. For additional information regarding the merchandising partnership, see Part II - Item 8. Financial Statements and Supplementary Data - Note 1. Organization - Partnership with Fanatics and FLC, Note 2. Summary of Significant Accounting Policies - Merchandise Inventories, and Note 6. Equity and Earnings Per Share - Sale of Treasury Shares. 45 -------------------------------------------------------------------------------- Index to Form 10-K Index to FS Sources and Uses of Cash Flow Our Fiscal 2021 results have been significantly impacted by the ongoing COVID-19 pandemic, as many schools continued to adjust their learning model and on-campus activities in response to the pandemic. See "Overview" for more information. A detailed year-over-year comparisons between Fiscal 2020 and Fiscal 2019 can be found in Part II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity in our Annual Report on Form 10-K for the year endedMay 2, 2020 filed with theSEC onJuly 14, 2020 . Dollars in thousands Fiscal 2021 Fiscal 2020 Fiscal 2019 Cash, cash equivalents, and restricted cash at beginning of period$ 9,008 $ 14,768 $ 16,869 Net cash flows provided by (used in) operating activities 32,882 (8,676) 121,791 Net cash flows used in investing activities (36,875) (37,019) (55,620) Net cash flows provided by (used in) financing activities 11,799 39,935 (68,272)
Cash, cash equivalents, and restricted cash at end of period
$ 16,814
Cash Flow from Operating Activities Our business is highly seasonal. For our retail operations, cash flows from operating activities are typically a source of cash in the second and third fiscal quarters, when students generally purchase and rent textbooks and other course materials for the upcoming semesters based on the typical academic semester. For our wholesale operations, cash flows from operating activities are typically a source of cash in the second and fourth fiscal quarters, as payments are received from the summer and winter selling season when textbooks and other course materials are sold for retail distribution. For both retail and wholesale, cash flows from operating activities are typically a use of cash in the fourth fiscal quarter, when sales volumes are materially lower than the other quarters. For our DSS segment, cash flows are not seasonal as cash flows from operating activities are typically consistent throughout the year. Our quarterly cash flows also may fluctuate depending on the timing of the start of the various schools' semesters, as well as shifts in our fiscal calendar dates. These shifts in timing may affect the comparability of our results across periods. Cash flows provided by operating activities during Fiscal 2021 were$32.9 million compared to cash flow used in operating activities of$(8.7) million during Fiscal 2020. This increase in cash provided by operating activities of$41.6 million was primarily due to proceeds from the sale of logo merchandise inventory to FLC of$41.8 million , partially offset by lower net income, an increase in other long-term liabilities due to sale of treasury shares at a premium (discussed above), and changes in working capital. As discussed above, our operations were highly impacted by the COVID-19 pandemic in Fiscal 2021. Cash Flow from Investing Activities Cash flows used in investing activities during Fiscal 2021 were$(36.9) million compared to$(37.0) million during Fiscal 2020. Cash used in investing activities is primarily for capital expenditures and contractual capital investments associated with content development, digital initiatives, enhancements to internal systems and websites, renewing existing contracts and new store construction and lower payments to acquire businesses and the change in other noncurrent assets for contractual obligations. Capital expenditures totaled$37.2 million and$36.2 million during Fiscal 2021 and Fiscal 2020, respectively. Cash Flow from Financing Activities Cash flows provided by financing activities during Fiscal 2021 were$11.8 million compared to$39.9 million during Fiscal 2020. This net change of$28.1 million is primarily due to higher net borrowings under the credit agreement and the sale of treasury shares of$10.9 million (discussed above), partially offset by the payment of deferred financing costs of$1.1 million . Financing Arrangements We have a credit agreement (the "Credit Agreement"), amendedMarch 31, 2021 andMarch 1, 2019 , under which the lenders committed to provide us with a five-year asset-backed revolving credit facility in an aggregate committed principal amount of$400 million (the "Credit Facility"). We have the option to request an increase in commitments under the Credit Facility of up to$100 million , subject to certain restrictions. Proceeds from the Credit Facility are used for general corporate purposes, including seasonal working capital needs. The agreement includes an incremental first in, last out seasonal loan facility (the "FILO Facility") for a$100 million incremental facility maintaining the maximum availability under the Credit Agreement at$500 million . OnMarch 31, 2021 , we were granted a waiver to the availability test condition to the current draw under the FILO Facility. During the 52 weeks endedMay 1, 2021 , we borrowed$719.7 million and repaid$722.6 million under the Credit Agreement, with$177.6 million of outstanding borrowings as ofMay 1, 2021 . During the 53 weeks endedMay 2, 2020 , we 46 -------------------------------------------------------------------------------- Index to Form 10-K Index to FS borrowed$600.9 million and repaid$559.7 million under the Credit Agreement, with$174.7 million of outstanding borrowings as ofMay 2, 2020 . During 52 weeks endedApril 27, 2019 , we borrowed$521.2 million and repaid$584.1 million under the Credit Agreement, and had outstanding borrowings of$33.5 million and$100.0 million under the Credit Facility and FILO Facility, respectively, as ofApril 27, 2019 . As of bothMay 1, 2021 andMay 2, 2020 , we have issued$4.8 million in letters of credit under the Credit Facility. During the 52 weeks endedMay 1, 2021 , we incurred debt issuance costs totaling$1.1 million related to theMarch 31, 2021 Credit Facility amendment. The debt issuance costs have been deferred and are presented as prepaid and other current assets and other noncurrent assets in the consolidated balance sheets, and subsequently amortized ratably over the term of the credit agreement. The Credit Facility is secured by substantially all of the inventory, accounts receivable and related assets of the borrowers under the Credit Facility. This is considered an all asset lien (inclusive of proceeds from tax refunds payable to the Company and a pledge of equity from subsidiaries, exclusive of real estate). Interest under the Credit Facility accrues, at our election, at a LIBOR or alternate base rate, plus, in each case, an applicable interest rate margin, which is determined by reference to the level of excess availability under the Credit Facility. Loans will initially bear interest at LIBOR plus 2.00% per annum, in the case of LIBOR borrowings, or at the alternate base rate plus 1.00% per annum, in the alternative, and thereafter the interest rate will fluctuate between LIBOR plus 2.00% per annum and LIBOR plus 1.50% per annum (or between the alternate base rate plus 1.000% per annum and the alternate base rate plus 0.50% per annum), based upon the excess availability under the Credit Facility at such time. Loans under the FILO Facility will bear interest at a rate equal to the LIBOR rate, plus 3.750%. In connection with the waiver, the applicable margin for credit extensions made under the FILO Facility afterMarch 31, 2021 through the end of 2021 was increased by 0.50% (to 3.75% per annum for LIBO rate loans and 2.75% for base rate loans). The FILO Facility will be available solely during the draw period each year, fromApril 1 through July 31 . We are required to borrow 100% of the aggregate commitments under the FILO Facility onApril 1 of each year, and the loans must be repaid in full (including interest and fees) onJuly 31 of each year. The commitments under the FILO Facility will decrease from$50.0 million to$25.0 million onAugust 1, 2021 . We will pay a commitment fee of 0.375% on the daily unused portion of the FILO Facility. The Credit Facility contains customary negative covenants, which limit the Company's 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 and a minimum excess availability of the greater of 10% of the Loan Cap and$25.0 million when the FILO is funded) would be triggered, and the lenders would have the right to assume dominion and control over the Company's cash. The Credit Facility includes an anti-cash hoarding provision, which limits maximum excess cash allowed to$50.0 million when the FILO is funded. The Credit Facility 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 Facility also contains customary affirmative covenants and representations and warranties. We are in compliance with all covenants, representations and warranties under the Credit Facility as ofMay 1, 2021 . Income Tax Implications on Liquidity As ofMay 1, 2021 , other long-term liabilities includes$25.3 million 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 is dependent on the inventory levels at the end of our tax year (on or aboutJanuary 31st ) which is in the middle of our second largest selling cycle. At the end of the most recent tax year, inventory levels declined as compared to the prior year resulting in approximately$0.7 million of the LIFO reserve becoming currently payable. Given recent trends relating to the pricing and rental of textbooks, management believes that an additional portion of the remaining long-term tax payable associated with the LIFO reserve could be payable within the next twelve months. 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. Share Repurchases OnDecember 14, 2015 , our Board of Directors authorized a stock repurchase program of up to$50 million , 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. During Fiscal 2021, Fiscal 2020, and Fiscal 2019, we did not purchase shares under the stock repurchase program. As ofMay 1, 2021 , approximately$26.7 million remains available under the stock repurchase program. 47 -------------------------------------------------------------------------------- Index to Form 10-K Index to FS During Fiscal 2021, Fiscal 2020, and Fiscal 2019, we also repurchased 414,174 shares, 374,733 shares, and 351,043 shares of our common stock, respectively, in connection with employee tax withholding obligations for vested stock awards. Contractual Obligations The following table sets forth our contractual obligations as ofMay 1, 2021 (in millions): Payments Due by Period Less Than 1-3 3-5 More Than Total 1 Year Years Years 5 Years Credit Facility (a)$ 127.6 $ 127.6 $ - $ - $ - FILO Facility (a) 75.0 50.0 25.0 - - Lease obligations (excluding imputed interest) (b) 320.8 99.7 89.1 61.8 70.2 Purchase obligations (c) 26.3 14.8 11.0 0.5 - Other long-term liabilities reflected on the balance sheet under GAAP (d) (e) - - - - - Total$ 549.7 $ 292.1 $ 125.1 $ 62.3 $ 70.2 (a)As ofMay 1, 2021 , we had a total of$177.6 million of outstanding borrowings under the Credit Facility and FILO Facility. See Financing Arrangements discussion above for information about future borrowings and payments under the FILO Credit Facility. (b)Our contracts for physical bookstores with colleges and universities are typically five years with renewal options, but can range from one to 15 years, and are typically cancelable by either party without penalty with 90 to 120 days' notice. Annual projections are based on current minimum guarantee amounts. In approximately 50% of our contracts with colleges and universities that include minimum guarantees, the minimum guaranteed amounts adjust annually to equal less than the prior year's commission earned. Excludes obligations under store leases for property insurance and real estate taxes, which totaled approximately 2.7% of the minimum rent payments under those leases. (c)Includes information technology contracts. (d)Other long-term liabilities excludes$25.3 million of tax liabilities related to the long-term tax payable associated with the LIFO reserve for which we cannot make a reasonably reliable estimate of the amount and period of payment. See Income Tax Implications on Liquidity discussed above. (e) Other long-term liabilities excludes expected payments related to employee benefit plans. See Part II - Item 8. Financial Statements and Supplementary Data - Note 12. Employee Benefit Plans. Certain Relationships and Related Party Transactions See Part II - Item 8. Financial Statements and Supplementary Data - Note 11. Related Party Transactions. Critical Accounting Policies and Estimates In preparing our consolidated financial statements in accordance with GAAP, we are required to use judgment in making estimates and assumptions that affect the amounts reported in our consolidated financial statements and related notes. In preparing these financial statements, management has made its best estimates and judgments with respect to certain amounts included in the financial statements, giving due consideration to materiality. We do not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. Revenue Recognition and Deferred Revenue Product sales and rentals The majority of our revenue is derived from the sale of products through our bookstore locations, including virtual bookstores, and our bookstore affiliated e-commerce websites, and contains a single performance obligation. Revenue from sales of our products is recognized at the point in time when control of the products is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for the products. For additional information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 4. Revenue. Retail product revenue is recognized when the customer takes physical possession of our products, which occurs either at the point of sale for products purchased at physical locations or upon receipt of our products by our customers for products ordered through our websites and virtual bookstores. Wholesale product revenue is recognized upon shipment of physical textbooks at which point title passes and risk of loss is transferred to the customer. Additional revenue is recognized for shipping charges billed to customers and shipping costs are accounted for as fulfillment costs within cost of goods sold. 48 -------------------------------------------------------------------------------- Index to Form 10-K Index to FS Revenue from the rental of physical textbooks, which contains a single performance obligation, is deferred and recognized over the rental period based on the passage of time commencing at the point of sale, when control of the product transfers to the customer. Rental periods are typically for a single semester and are always less than one year in duration. We offer a buyout option to allow the purchase of a rented physical textbook at the end of the rental period if the customer desires to do so. We record the buyout purchase when the customer exercises and pays the buyout option price which is determined at the time of the buyout. In these instances, we accelerate any remaining deferred rental revenue at the point of sale. Revenue from the rental of digital textbooks, which contains a single performance obligation, is recognized at the point 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 estimate returns based on an analysis of historical experience. A provision for anticipated merchandise returns is provided through a reduction of sales and cost of goods sold in the period that the related sales are recorded. For sales and rentals involving third-party products, we evaluate whether we are acting as a principal or an agent. Our determination is based on our evaluation of whether we control the specified goods or services prior to transferring them to the customer. There are significant judgments involved in determining whether we control the specified goods or services prior to transferring them to the customer including whether we have the ability to direct the use of the good or service and obtain substantially all of the remaining benefits from the good or service. For those transactions where we are the principal, we record revenue on a gross basis, and for those transactions where we are an agent to a third-party, we record revenue on a net basis. We do not have gift card or customer loyalty programs. We do not treat any promotional offers as expenses. Sales tax collected from our customers is excluded from reported revenues. Our payment terms are generally 30 days and do not extend beyond one year. Service and other revenue Service and other revenue is primarily derived from DSS segment subscription-based service revenues and partnership marketing services which includes promotional activities and advertisements within our physical bookstores and web properties performed on behalf of third-party customers. Subscription-based revenue, which contains a single performance obligation, is deferred and recognized based on the passage of time over the subscription period commencing at the point of sale, when control of the service transfers to the customer. The majority of subscriptions sold are one month in duration. Partnership marketing agreements often include multiple performance obligations which are individually negotiated with our customers. For these arrangements that contain distinct performance obligations, we allocate the transaction price based on the relative standalone selling price method by comparing the standalone selling price ("SSP") of each distinct performance obligation to the total value of the contract. The revenue is recognized as each performance obligation is satisfied, typically at a point in time for partnership marketing service and overtime for advertising efforts as measured based upon the passage of time for contracts that are based on a stated period of time or the number of impressions delivered for contracts with a fixed number of impressions. 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. Cost is determined primarily by the retail inventory method for our Retail Segment and last-in first out, or "LIFO", method for our Wholesale Segment. Our textbook inventories, for Retail and Wholesale, and trade book inventories are valued using the LIFO method and the related reserve was not material to the recorded amount of our inventories. There were no LIFO adjustments in Fiscal 2021, Fiscal 2020, and Fiscal 2019. Reserves for non-returnable inventory are based on our history of liquidating non-returnable inventory. Reserve calculations are sensitive to certain significant assumptions, including markdowns, sales below cost, inventory aging and expected demand. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to calculate the non-returnable inventory reserve. However, if assumptions based on our history of liquidating non-returnable inventory are incorrect, we may be exposed to losses or gains that could be material. A 10% change in actual non-returnable inventory would have affected pre-tax earnings by approximately$6.0 million in Fiscal 2021. For our physical bookstores, 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. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to calculate shortage rates. However, if our estimates 49 -------------------------------------------------------------------------------- Index to Form 10-K Index to FS regarding shortage rates are incorrect, we may be exposed to losses or gains that could be material. A 10 basis point change in actual shortage rates would have affected pre-tax earnings by approximately$0.2 million in Fiscal 2021. 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. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to calculate rental cost of goods sold. However, if our estimates regarding residual value are incorrect, we may be exposed to losses or gains that could be material. A 1% change in rental cost of goods sold would have affected pre-tax earnings by approximately$0.4 million in Fiscal 2021. Long-Term Incentive Compensation The assumptions used in calculating the fair value of long-term incentive compensation payment awards represent management's best estimates, but these estimates involve inherent uncertainties and the application of management's judgment. See Part II - Item 8. Financial Statements and Supplementary Data - Note 13. Long-Term Incentive Compensation Expense for a further discussion of our stock-based incentive plan. We are required to estimate the expected forfeiture rate, and only recognize expense for those shares expected to vest. If their actual forfeiture rate is materially different from their estimate, our long-term incentive compensation expense could be significantly different from what we recorded in the current period. For stock options granted with an "at market" exercise price, we determined the grant fair value using the Black-Scholes model and for stock options granted with "a premium" exercise price, we determined the grant date fair value using the Monte Carlo simulation model. The fair value models for stock options use assumptions that include the risk-free interest rate, expected volatility, expected dividend yield and expected term of the options. Phantom shares will be settled in cash based on the fair market value of a share of common stock at each vesting date in an amount not to exceed a specific price per share. The fair value of the phantom shares was determined using the closing stock price on the date of the award less the fair value of the call option which was estimated using the Black-Scholes model. The fair value of the liability for the cash-settled phantom share unit awards will be remeasured at the end of each reporting period through settlement to reflect current risk-free rate and volatility assumptions. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to determine long-term incentive compensation expense. If actual results are not consistent with the assumptions used, the long-term incentive compensation expense reported in our financial statements may not be representative of the actual economic cost of the long-term incentive compensation. A 10% change in our long-term incentive compensation expense would have affected pre-tax earnings by approximately$0.9 million in Fiscal 2021. Evaluation of Other Long-Lived Assets Impairment As ofMay 1, 2021 , our other long-lived assets include property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets of$89.2 million ,$240.5 million ,$150.9 million , and$29.1 million , respectively, on our consolidated balance sheet. We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and consider market participants in accordance with Accounting Standards Codification ("ASC") 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets. We evaluate the long-lived assets of the reporting units for impairment at the lowest asset group level for which individual cash flows can be identified. When evaluating long-lived assets for potential impairment, we first compared the carrying amount of the asset group to the estimated future undiscounted cash flows. The impairment loss calculation compares the carrying amount of the assets to the fair value based on estimated discounted future cash flows. If required, an impairment loss is recorded for that portion of the asset's carrying value in excess of fair value. Fiscal 2021 results have been significantly impacted by the ongoing COVID-19 pandemic, as many schools adjusted their learning models and on-campus activities. Many of the trends observed during the Fall semester continued into the Spring semester, as fewer students have returned to campus for the Spring semester, many colleges and universities continued with remote learning models and on-campus classes and activities have been further curtailed, including many athletic conferences that have been either eliminated or severely restricted. These combined events impacted the Company's course materials and general merchandise business. During the third quarter of Fiscal 2021, we evaluated certain of our store-level long-lived assets in the Retail segment for impairment. Based on the results of the impairment tests, we recognized an impairment loss (non-cash) of$27.6 million ,$20.5 million after-tax, comprised of$5.1 million ,$13.3 million ,$6.3 million and$2.9 million of property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets, respectively, 50 -------------------------------------------------------------------------------- Index to Form 10-K Index to FS on the consolidated statement of operations. The fair value of the impaired long-lived assets were determined using an income approach (Level 3 input), using the Company's best estimates of the amount and timing of future discounted cash flows, based on historical experience, market conditions, current trends and performance expectations. For additional information, see Part II - Item 8. Financial Statements and Supplementary Data - Note 7. Fair Value Measurements. In the first quarter of Fiscal 2020, we recorded an impairment loss (non-cash) of$0.4 million in the Retail segment related to net capitalized development costs for a project which are not recoverable. During the fourth quarter of Fiscal 2020, in conjunction with COVID-19 related campus store closures, we evaluated certain of our long-lived assets associated with our Retail and Wholesale segments for impairment. Based on the results of the tests, for the Retail segment, we recognized an impairment loss of$0.6 million related to store-level assets in restructuring and other charges. These long-lived assets were not recoverable and had a de minimis fair value, as determined using an income approach (Level 3 input), resulting in a non-cash impairment charge for the full carrying value of those long-lived assets. During the fourth quarter of Fiscal 2019, in conjunction with the change to reporting segments and the interim goodwill impairment test noted below, as well as operational changes in certain long-lived asset groups, we evaluated certain of our long-lived assets for impairment and recognized an impairment loss of$8.4 million , comprised of$8.1 million of intangible assets, primarily acquired technology, and$0.3 million of property and equipment related to our LoudCloud and Promoversity operations. These long-lived assets were not recoverable and had a de minimis fair value, as determined using the relief-from-royalty and income approaches (Level 3 input), resulting in a non-cash impairment charge for the full carrying value of those long-lived assets. The impairment analysis process requires significant estimation to determine recoverability of each asset group and to determine the fair value of asset groups that were not recoverable, as well as the fair values of certain operating right-of-use assets included within the asset groups that were not recoverable. The significant assumptions used included annual revenue growth rates, gross margin rates and the estimated relationship of selling and administrative costs to revenue used to estimate the projected cash-flow directly related to the future operation of the stores as well as the weighted average cost of capital used to calculate the fair value. Significant assumptions used to determine the fair values of certain operating right-of-use assets included the current market rent and discount rate. These assumptions are subjective in nature and are affected by expectations about future market or economic conditions (including the effects of the global pandemic). We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to calculate long-lived asset impairment losses. However, if actual results are not consistent with estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to losses that could be material. A 10% decrease in our estimated discounted cash flows would not have materially affected the results of our operations in Fiscal 2021. Evaluation of Goodwill Impairment The costs in excess of net assets of businesses acquired are carried as goodwill in the accompanying consolidated balance sheets. In accordance with ASC 350-10, Intangibles -Goodwill and Other, we complete our annual goodwill impairment test as of the first day of the third quarter of each fiscal year, or whenever events or changes in circumstances indicate that the carrying amount of the reporting unit exceeds its fair value. As of bothMay 1, 2021 andMay 2, 2020 , we had$0 ,$0 and$4,700 million of goodwill on our consolidated balance sheets related to our Retail, Wholesale, and DSS reporting units, respectively. During the third quarter of both Fiscal 2021 and Fiscal 2020, we completed our annual goodwill impairment test and concluded that the fair value of the DSS reporting unit was determined to exceed the carrying value of the reporting unit; therefore, no goodwill impairment was recognized. During the third quarter of Fiscal 2019, we completed our annual goodwill impairment test and concluded that the fair value of the MBS and DSS reporting units, as they existed at that time, each exceeded their respective carrying values and no goodwill impairment was recognized. In the fourth quarter of Fiscal 2019, due to the change in our reporting units identified as a result of the change in our reportable segments, we recognized a total goodwill impairment (non-cash impairment loss) of$49.3 million associated with the MBS reporting unit (as it existed at that date) and allocated$20.5 million of goodwill to the Retail Segment and$28.7 million of goodwill to the Wholesale Segment. Application of the goodwill impairment test requires judgment, including: the identification of reporting units; assignment of assets and liabilities to reporting units; assignment of goodwill to reporting units; and the determination of the fair value of each reporting unit. 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. We estimated the fair value of our reporting units using a weighting of fair values derived from the income approach and the market approach for our annual impairment testing and using the income approach for our interim impairment test. Under the income approach, we calculate the fair value of the reporting unit based on the present value of estimated future cash flows. Inherent in our preparation of cash flow projections are assumptions and estimates derived from a review of our operating results, business plans, expected growth rates, cost of capital and tax rates. We also make certain forecasts about future 51 -------------------------------------------------------------------------------- Index to Form 10-K Index to FS economic conditions, interest rates, market data, and other observable trends, such as comparable store sales trends, recent changes in publisher relationships, and development of innovative digital products and services in the rapidly changing education landscape. The discount rate used is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the business's ability to execute on the projected cash flows. Under the market approach, we estimate the fair value based on market multiples of cash flows and earnings derived from comparable publicly-traded companies with similar operating and investment characteristics as the reporting unit and considering a reasonable control premium. Many of the factors used in assessing fair value are outside the control of management, and these assumptions and estimates may change in future periods. Changes in assumptions or estimates could materially affect the estimate of the fair value, and therefore could affect the likelihood and amount of potential impairment. The following assumptions are significant to our evaluation process: Business Projections- We make assumptions about the level of revenues, gross profit, operating expenses, as well as capital expenditures and net working capital requirements. These assumptions drive our planning assumptions and represent key inputs for developing our cash flow projections. These projections are developed using our internal business plans over a five-year planning period that are updated at least annually; Long-term Growth Rates- We also utilize an assumed long-term growth rate representing the expected rate at which our cash flow stream is projected to grow. These rates are used to calculate the terminal value and are added to the cash flows projected during our five-year planning period; and Discount Rates- The estimated future cash flows are then discounted at a rate that is consistent with a weighted-average cost of capital that is likely to be expected by market participants. The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt holders of a business enterprise. Income Taxes Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax basis and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. FASB guidance on accounting for income taxes requires that deferred tax assets be evaluated for future realization and reduced by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent earnings experience and expectations of future taxable income by taxing jurisdiction, the carryforward periods available to us for tax reporting purposes and other relevant factors. The actual realization of deferred tax assets may differ significantly from the amounts we have recorded. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. Accounting for income taxes requires a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if available evidence indicates it is more likely than not that the tax position will be fully sustained upon review by taxing authorities, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount with a greater than 50 percent likelihood of being realized upon ultimate settlement. For tax positions that are 50 percent or less likely of being sustained upon audit, we do not recognize any portion of that benefit in the financial statements. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. Our actual results could differ materially from our current estimates. Recent Accounting Pronouncements See Item 8. Financial Statements and Supplementary Data - Note 3. Recent Accounting Pronouncements for information related to new accounting pronouncements. 52
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