NOTE 3. DISCONTINUED OPERATIONS

In the second quarter of 2016, following termination of the Staples Agreement, the Company disclosed its intention to explore strategic alternatives regarding its European business of the International Division.

On September 23, 2016, the Company announced that it had received an irrevocable offer from Aurelius Rho Invest DS GmbH, a subsidiary of The AURELIUS Group (the “Purchaser”) to acquire the Company’s European business operations (the “European Business”). The transaction is structured as an equity sale, for nominal consideration, with the Purchaser acquiring the European Business with its operating assets and liabilities.

The Purchaser offered to purchase the European Business on the terms and conditions set out in a form of sale and purchase agreement. Upon completion of the consultation with central works council in France, the Company will have an option to enter into a definitive sale and purchase agreement (the “SPA”). If the Company does not exercise the option within the prescribed time period, the Company will be required to pay a EUR 5 million fee to the Purchaser. The transaction is subject to receipt of antitrust clearance (or expiration of the relevant waiting period) of the European Commission and contains certain indemnities from the Company. The SPA contains certain warranties of the Company and the Purchaser, with the Company’s warranties limited to an aggregate of EUR 10 million. The Company is optimistic that the transaction can close by the end of 2016. The Company will retain responsibility for the European defined benefit pension plan which is frozen and covers a limited number of employees in the United Kingdom.

The offer to purchase includes a required maintenance of working capital components up to the time of closing. Any deficiency at closing would result in an increase to the estimated loss on classification as discontinued operations that was recognized in the third quarter of 2016. The Company will provide various transition services to the Purchaser for six to 24 months under a separate agreement.

In addition to approving the sale of the European Business in the third quarter of 2016, the Company’s Board of Directors approved a plan to sell substantially all of the remaining operations of the International Division. The Company is actively marketing for sale the businesses in South Korea, mainland China, Australia and New Zealand and expects to complete the dispositions within 12 months. As such, the assets and liabilities of the entities expected to be sold were classified as held for sale. Collectively, the International Division dispositions represent a strategic shift that has a major impact on the Company’s operations and financial results. Accordingly, the operations of the International Division businesses classified as held for sale also have been reported as discontinued operations, beginning in the third quarter 2016. The retained sourcing and trading operations of the former International Division are presented as Other in Note 11, Division Information.

The contract price for the European business was below the entity’s carrying value, resulting in an incremental impairment charge to reduce the carrying value of European long-lived assets, with the remainder considered a valuation allowance against the remaining assets. The loss on classification as discontinued operations relating to the remaining entities was measured at the lower of carrying value or estimated fair value less costs to sell and is included in the valuation allowance in the balance sheet as shown below. Completion of the sale of the European Business and sales of the remaining international operations may be for amounts different from the third quarter 2016 estimates and will be evaluated each reporting period until the dispositions are complete. Additionally, cumulative translation adjustments currently presented in Accumulated other comprehensive income will be recognized as part of the loss as dispositions are finalized. Substantially all of the foreign currency translation adjustments reported in Note 6 relate to entities in the former International Division.

In accordance with the Company’s annual goodwill impairment test as of the first day of the third quarter, the $15 million of goodwill in the Australia/New Zealand reporting unit was considered impaired based on a decrease in the long-term projected cash flows and related estimated terminal value of that business.

Restructuring charges incurred by the International Division that previously have been presented as part of Corporate costs have been included in the measurement and presentation of discontinued operations.

The major components of Discontinued operations, net of tax presented in the Condensed Consolidated Statements of Operations include the following.


	Third Quarter						Year-to-Date
(In millions)	2016			2015			2016			2015
Sales	$	583		$	644		$	1,886		$	2,046
Cost of goods sold and occupancy costs		462			495			1,489			1,565
Operating expenses		139			147			435			464
Asset impairments		90			—			90			—
Restructuring charges		—			31			10			70
Interest income		—			—			—			2
Interest expense		—			—			(4	)		(2	)
Other income (expense), net		—			(1	)		(1	)		1
Loss on classification as discontinued operations		(304	)		—			(304	)		—
Income tax expense (benefit)		(126	)		6			(123	)		15

Discontinued operations, net of tax	$	(286	)	$	(36	)	$	(324	)	$	(67	)

Assets and liabilities of discontinued operations presented in the Condensed Consolidated Balance Sheets as of September 24, 2016, and December 26, 2015 include the following.


(In millions)	September 24, 2016			December 26, 2015
Assets
Cash and cash equivalents	$	142		$	209
Receivables, net		375			420
Inventories		259			292
Prepaid expenses and other current assets		47			35
Property and equipment, net		33			—
Other assets		21			—
Valuation allowance		(297	)		—

Current assets of discontinued operations	$	580		$	956

Property and equipment, net		—			119
Goodwill		—			15
Other assets		—			39

Non-current assets of discontinued operations	$	—		$	173

Liabilities
Trade accounts payable	$	235		$	331
Accrued expenses and other current liabilities		228			282
Income taxes payable		6			4
Short-term borrowings and current maturities of long-term debt		10			5
Deferred income taxes and other long-term liabilities		35			—
Long-term debt, net of current maturities		5			—

Current liabilities of discontinued operations	$	519		$	622

Deferred income taxes and other long-term liabilities		—			40
Long-term debt, net of current maturities		—			6

Non-current liabilities of discontinued operations	$	—		$	46

Cash flows from discontinued operations for the year-to-date periods ended September 24, 2016 and September 26, 2015 include the following.


	Year-to-Date
(In millions)	September 24, 2016		September 26, 2015
Depreciation and amortization	$	19	$	23
Capital expenditures	$	6	$	15

Factoring Agreement

The sale of selected accounts receivables on a non-recourse basis to an unrelated financial institution under a factoring agreement in France remains in place. Amounts related to those sales are included in the components of discontinued operations.