NOTE 3. DISCONTINUED OPERATIONS

In the second quarter of 2016, following termination of the Staples Merger 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 “OD European Business”). The transaction was structured as an equity sale with the Purchaser acquiring the OD European Business with its operating assets and liabilities.

In addition to approving the sale of the OD 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. Collectively, the OD European Business sale and other planned dispositions represent a strategic shift that has a major impact on the Company’s operations and financial results and has been accounted for as discontinued operations. On December 31, 2016, the Company closed the sale of the OD European Business contemplated by the Sale and Purchase Agreement dated November 22, 2016, as amended (the “SPA”). Approximately $70 million was accrued at December 31, 2016 under a working capital adjustment provision, of which $35 million was paid during the first quarter of 2017. The Purchaser has disagreed with certain items related to the draft working capital adjustment payment schedule. As provided for in the SPA, the parties have engaged an independent accountant to finalize the working capital payment amount. The remaining working capital adjustment will be paid to the Purchaser once the independent accountant completes their review, which is currently expected to be in July 2017. The Company currently does not believe that the resolution of the items under disagreement will result in a material adjustment.

In April 2017, the Company announced that it had entered into definitive agreements to sell its businesses in Australia and New Zealand. The transaction to sell the businesses in Australia and New Zealand is subject to regulatory approval and the sale is expected to be completed later in 2017. The sale of the Company’s business in South Korea was completed on April 26, 2017. Refer to Note 12 Subsequent Events for further discussion. The Company is also actively marketing for sale its business in mainland China and expects to complete the disposition within the one year period associated with held for sale assets.

The Company has presented the operating results of the OD European Business within discontinued operations, net of tax in 2016. In addition, the Company’s businesses in Australia, New Zealand, South Korea and mainland China are presented within discontinued operations, net of tax in the Consolidated Statements of Operations for all periods presented. The related assets and liabilities of the disposal groups are presented as current assets and liabilities of discontinued operations in the Condensed Consolidated Balance Sheets as of April 1, 2017 and December 31, 2016. Cash flows from the Company’s discontinued operations are presented in the Condensed Consolidated Statements of Cash Flows for all periods. Certain portions of the former International Division assets and operations are being retained or did not meet the held for sale criteria at April 1, 2017 and, therefore, remain in continuing operations. These assets and operations are presented as Other in Note 11, Division Information.

The Company recorded an adjustment in the first quarter of 2017 to its carrying amount of the remaining entities that are held for sale based on its updated estimate of fair value less cost to sell. The adjustment resulted in a reduction in the related valuation allowance and is included in the net reduction of loss on discontinued operations in the table below. The adjusted carrying amount does not exceed the carrying amount of the entities at the time they were initially classified as held for sale. Completion of the sale of the remaining international operations may be for amounts different from the current estimates and will be evaluated each reporting period until the dispositions are complete.

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

With respect to the sale of the OD European Business, the SPA contains customary warranties of the Company and the Purchaser, with the Company’s warranties limited to an aggregate of EUR 10 million. The Company monitors its estimated exposure to liabilities under the warranties under the SPA. As of April 1, 2017, the Company believes it has made adequate provisions for its potential exposures related to these warranties. The Company will continue to provide various transition and product sourcing services to the Purchaser for a period of six to 24 months under a separate agreement. The proceeds and related costs from these services are presented in Other income, net in the Condensed Consolidated Statements of Operations. Also, as part of the disposition, the Company retained responsibility for the frozen defined benefits pension plan in the United Kingdom, which has been classified in continuing operations.

The Company retains guarantees in place as of September 23, 2016 with respect to the liabilities or obligations of the OD European Business and remains contingently liable for these obligations. As part of the OD European Business sale transaction, the Purchaser must indemnify and hold the Company harmless for any losses in connection with these guarantees and must obtain an unconditional and irrevocable release of a guarantee in certain circumstances. The Company currently does not believe it is probable it would be required to perform under any of these guarantees or any of the underlying obligations.

The major components of Discontinued operations, net of tax presented in the Condensed Consolidated Statements of Operations for the first quarter of 2017 and 2016 include the following.


	First Quarter
(In millions)	2017		2016
Sales	$	168	$	668
Cost of goods sold and occupancy costs		136		527
Operating expenses		27		150
Restructuring charges		1		5
Other income, net		1		—
Net reduction of loss on discontinued operations		38		—
Income tax expense		1		2

Discontinued operations, net of tax	$	42	$	(16	)

Assets and liabilities of discontinued operations presented in the Condensed Consolidated Balance Sheets as of April 1, 2017 and December 31, 2016 are included in the following table. As the sale of the OD European Business was completed before year end 2016, the assets and liabilities of that business are not included in either period presented below.


(In millions)	April 1, 2017			December 31, 2016
Assets
Cash and cash equivalents	$	58		$	44
Receivables, net		88			88
Inventories		63			82
Prepaid expenses and other current assets		2			4
Property and equipment, net		32			31
Other assets		7			6
Valuation allowance		(67	)		(113	)

Current assets of discontinued operations	$	183		$	142

Liabilities
Trade accounts payable	$	49		$	60
Accrued expenses and other current liabilities		28			27
Income taxes payable		1			2
Short-term borrowings and current maturities of long-term debt		9			9
Deferred income taxes and other long-term liabilities		5			6

Current liabilities of discontinued operations	$	92		$	104