Note 6. Segment Reporting

Prior to the fourth quarter of Fiscal 2018, we had two reportable segments: BNC and MBS. In connection with our focus on developing digital solutions, during the fourth quarter of Fiscal 2018, the Company realigned its business into the following three reportable segments: BNC, MBS and DSS. Additionally, unallocated shared-service costs, which include various corporate level expenses and other governance functions, are presented as “Corporate Services”.

We identified our segments in accordance with the way our business is managed (focusing on the financial information distributed) and the manner in which our chief operating decision maker allocates resources and assesses financial performance. The following summarizes the three segments, with additional information in each respective subsequent segment discussion.

BNC

The BNC Segment is comprised of the operations of BNC which operates 773 physical campus bookstores, the majority of which also have school-branded e-commerce sites operated by BNC and which offers students access to affordable course materials and affinity products, including emblematic apparel and gifts. BNC also offers its First Day™ inclusive access program, in which course materials, including e-content, are offered at a reduced price through a course materials fee, and delivered to students digitally on or before the first day of class. Additionally, the BNC segment offers a suite of digital content, software, and services to colleges and universities, through our LoudCloud platform, such as predictive analytics, a variety of open educational resources courseware, and a competency-based learning platform.

MBS

The MBS Segment is comprised of MBS's two highly integrated businesses: MBS Direct which operates 677 virtual bookstores for college and university campuses, and K-12 schools, and MBS Wholesale which is one of the largest textbook wholesalers in the country. MBS Wholesale's business centrally sources and sells new and used textbooks to more than 3,500 physical college bookstores, including BNC’s 773 campus bookstores. MBS Wholesale sells hardware and a software suite of applications that provides inventory management and point-of-sale solutions to over 400 college bookstores.

DSS

The Digital Student Solutions ("DSS") Segment includes direct-to-student products and services to help students study more effectively and improve academic performance. The DSS segment is comprised of the operations of Student Brands, a leading direct-to-student subscription-based writing services business, and Bartleby Textbook Solutions. The DSS segment also includes tutoring and test prep services offered through our partnership with The Princeton Review.

In August 2018, we launched Bartleby Textbook Solutions, our first internally developed product within DSS, on bartleby.com. We expect Bartleby Textbook Solutions to become a central offering in our developing ecosystem of direct-to-student digital products and services, accessible anytime and anywhere, both within our managed bookstore footprint and nationally to students.

Also in August 2018, we further expanded Student Brands' writing services via an acquisition of PaperRater, a leading website that offers students a suite of writing services aimed at improving multiple facets of writing. PaperRater's services include plagiarism detection, grammar feedback, and an AI-based writing score predictor, and are highly complementary to Student Brands' existing writing service offerings.

We currently offer these digital products and services directly to students, increasingly leveraging our BNC and MBS bookstore footprint.

For additional information about the BNC, MBS and DSS segment operations, see Part I - Item 1. Business in our Annual Report on Form 10-K for the year ended April 28, 2018.

Corporate Services

Corporate Services represent 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.

Intercompany Eliminations

All material intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements. The eliminations are primarily related to the following intercompany activities:


•	The sales eliminations represent the elimination of MBS sales to BNC and the elimination of BNC commissions earned from MBS.


•	The cost of sales eliminations represent (i) the recognition of intercompany profit for BNC inventory that was purchased from MBS in a prior period that was subsequently sold to external customers during the current period, net of (ii) the elimination of intercompany profit for MBS inventory purchases by BNC that remain in ending inventory at the end of the current period.

•

The gross margin elimination reflects the net impact of the sales eliminations and cost of sales eliminations. The gross margin elimination impact of $12,995 and $11,658 during the 13 weeks ended October 27, 2018 and October 28, 2017, respectively, primarily relates to (i) the recognition of intercompany profit for BNC inventory that was purchased from MBS in a prior period that was subsequently sold to external customers during the current period, net of (ii) the elimination of intercompany profit for MBS inventory purchases by BNC that remain in ending inventory at the end of the current period.

Summarized financial information for our reportable segments is reported below:



	13 weeks ended						26 weeks ended
	October 27, 2018			October 28, 2017			October 27, 2018			October 28, 2017
Sales:
BNC	$	702,870		$	757,301		$	948,045		$	1,007,278
MBS	118,954			134,851			249,278			274,652
DSS ^(a)	4,934			4,486			10,611			4,486
Elimination	(11,992		)	(9,777		)	(55,684		)	(43,844		)
Total Sales	$	814,766		$	886,861		$	1,152,250		$	1,242,572

Gross Profit
BNC	$	162,083		$	167,523		$	211,398		$	216,747
MBS	30,893			33,175			57,644			60,764
DSS ^(a)	4,789			4,344			10,343			4,344
Elimination	12,995			11,658			(2,015		)	45
Total Gross Profit	$	210,760		$	216,700		$	277,370		$	281,900

Depreciation and Amortization
BNC	$	12,897		$	13,331		$	26,152		$	26,664
MBS	1,569			1,618			3,099			3,253
DSS ^(a)	1,917			1,709			3,626			1,709
Corporate Services	38			46			82			95
Total Depreciation and Amortization	$	16,421		$	16,704		$	32,959		$	31,721

Operating Income (Loss)
BNC	$	55,561		$	59,151		$	12,606		$	13,861
MBS	16,990			18,228			30,352			32,106
DSS ^(a)	(1,015		)	(1,404		)	51			(1,627		)
Corporate Services ^(b)	(6,091		)	(4,377		)	(11,628		)	(16,668		)
Elimination	13,034			11,658			(1,974		)	45
Total Operating Income	$	78,479		$	83,256		$	29,407		$	27,717

The following is a reconciliation of segment Operating Income to consolidated Income Before Income Taxes:
Total Operating Income	$	78,479		$	83,256		$	29,407		$	27,717
Interest Expense, net	(1,836		)	(1,836		)	(5,358		)	(4,874		)
Income Before Income Taxes	$	76,643		$	81,420		$	24,049		$	22,843

(a) On August 3, 2017, we acquired Student Brands, LLC, a leading direct-to-student subscription-based writing services business. The condensed consolidated financial statements for the 13 and 26 weeks ended October 27, 2018 include the financial results of Student Brands in the DSS segment, and the condensed consolidated financial statements for the 13 and 26 weeks ended October 28, 2017 include the financial results of Student Brands from the date of acquisition on August 3, 2017.

On August 21, 2018, we acquired the assets of PaperRater.com, a leading website that offers students a suite of writing services aimed at improving multiple facets of writing. PaperRater’s services include plagiarism detection, grammar feedback, and an AI-based writing score predictor, and are highly complementary to Student Brands’ existing writing service offerings. The condensed consolidated financial statements for the 13 and 26 weeks ended October 27, 2018 include the financial results of PaperRater in the DSS segment from the date of acquisition and the condensed consolidated financial statements for the 13 and 26 weeks ended October 28, 2017 exclude the financial results of PaperRater.

(b) During the 26 weeks ended October 28, 2017, we recognized restructuring and other charges totaling approximately $5,361 related to the CEO transition. For additional information, refer to Note 10. Supplementary Information - Restructuring and Other Charges.