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DISCONTINUED OPERATIONS | 9 Months Ended
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Sep. 30, 2017
DISCONTINUED OPERATIONS | NOTE 4. DISCONTINUED OPERATIONS In the third quarter of 2016, the Company’s Board of Directors approved a plan to sell substantially all of the operations of the former International Division through four disposal groups (Europe, South Korea, Australia and New Zealand (“Oceania”) and mainland China). Collectively, these dispositions represent a strategic shift that has a major impact on the Company’s operations and financial results and have been accounted for as discontinued operations. The Company is presenting the operating results and cash flows of these disposal groups within discontinued operations through their respective dates of disposal, including all prior periods. The assets and liabilities of the disposal groups remaining at the end of each period are presented as current assets and liabilities of discontinued operations in the Condensed Consolidated Balance Sheets. Certain portions of the former International Division assets and operations are being retained and, therefore, remain in continuing operations. The retained operations are presented as Other in Note 12, Segment Information. Europe 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 was structured as an equity sale with the Purchaser acquiring the European Business with its operating assets and liabilities. On December 31, 2016, the Company closed the sale of the European Business resulting in a pre-tax loss on sale of $108 million. The Company recorded approximately $8 million of additional costs associated with the sale of the European Business during year-to-date 2017, which are included in Net gain on sale of discontinued operations in the table below. Approximately $70 million was accrued at December 31, 2016, under a working capital adjustment provision of the sale and purchase agreement (the “SPA”), of which $35 million was paid during the first quarter of 2017. The Purchaser subsequently disagreed with certain items related to the working capital adjustment schedule and, as provided for in the SPA, the parties engaged an independent accountant to resolve the disagreements. In July 2017, the dispute was resolved favorably and the Company paid the remaining working capital adjustment of $37 million to the Purchaser, which included approximately $2 million related to a change in the foreign currency rate and accrued interest on the unpaid portion. 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, and as of September 30, 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 up to 24 months following the closing date under a separate agreement. The proceeds and related costs from these services are not material and are presented in Other income (expense), net as part of continuing operations 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 is now included in continuing operations. The Company retains certain guarantees in place with respect to the liabilities or obligations of the European Business and remains contingently liable for these obligations. However, the Purchaser must indemnify and hold the Company harmless for any losses in connection with these guarantees. 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. South Korea The sale of the Company’s business in South Korea was completed on April 26, 2017. The transaction was structured and accounted for as an equity sale. Disposition of the business in South Korea resulted in a pre-tax gain on sale of $12 million during the second quarter of 2017, which has been reflected in Net gain on sale of discontinued operations for year-to-date 2017 in the table below. China The sale of the Company’s business in mainland China was completed on July 28, 2017. The transaction was structured and accounted for as an equity sale. Prior to the sale, the Company recorded a reduction of $10 million in the first half of 2017 to the carrying amount of its China Business based on its updated estimates of fair value less cost to sell. The adjustment is included in Net (increase) reduction of loss on discontinued operations held for sale for year-to-date 2017 in the table below. The disposition of the business in mainland China in the third quarter of 2017 resulted in a gain of $1 million, which is included in Net gain on sale of discontinued operations for quarter-to-date2017 in the table below, resulting in a cumulative loss of $9 million. Oceania On April 18, 2017, the Company entered into a definitive sale and purchase agreement to sell the Company’s Australian and New Zealand business operations. The transaction is structured and will be accounted for as an equity sale, and remains subject to the purchaser obtaining necessary regulatory approval. During the third quarter of 2017, the purchaser paid the Company $8 million in exchange for the extension of the sale and purchase agreement through December 2017. The $8 million, which is presented in Accrued expenses and current liabilities in the Condensed Consolidated Balance Sheet, will be applied to the purchase price when the transaction is completed or if not successfully completed will be treated as a break fee and recorded in Other income (expense), net, within discontinued operations. The Company recorded adjustments of $58 million during year-to-date 2017, to its carrying amount of this disposal group that is held for sale based on its updated estimates of fair value less cost to sell. The adjustments resulted in a reduction in the related valuation allowance and are included in the Net (increase) reduction of loss on discontinued operations held for sale in the table below. The adjusted carrying amount does not exceed the carrying amount at the time these operations were initially classified as held for sale. There were no increase or reduction of loss related to this disposal group during the third quarter of 2017. Until the closing date, the Company has agreed to operate the Australian and New Zealand businesses in the ordinary course. The Company may provide certain transitional services to the purchaser for a limited period of time following the closing. On November 2, 2017, the Commerce Commission of New Zealand (the “Commerce Commission”) filed proceedings in the High Court at Auckland seeking to enjoin the contemplated transaction. The Commerce Commission has applied to consolidate its proceedings with those initiated by Complete Office Supplies Pty Limited, an office supply competitor in New Zealand. The parties requested the High Court to vacate the interim injunction hearing and proceed to trial. The trial date is not yet scheduled. The purchaser has expressed their intention to continue to challenge the actions of the Commerce Commission. The Company currently remains committed to completing the sale as soon as practicable, including reviewing the possibility of further extending the sale and purchase agreement. Completion of the sale of the Company’s Australian and New Zealand business operations may be for amounts different from the current estimates and will be evaluated each reporting period until the dispositions are complete. The major components of Discontinued operations, net of tax presented in the Condensed Consolidated Statements of Operations are presented below. The 2016 amounts include the results of the European Business, which was sold at the end of 2016.
|  | Third Quarter |  |  | Year-to-Date |
(In millions) |  | 2017 |  |  | 2016 |  |  | 2017 |  |  | 2016 |
Sales |  | $ | 111 |  |  | $ | 583 |  |  | $ | 398 |  |  | $ | 1,886 |
Cost of goods sold and occupancy costs |  |  | 89 |  |  |  | 462 |  |  |  | 322 |  |  |  | 1,489 |
Operating expenses |  |  | 25 |  |  |  | 139 |  |  |  | 79 |  |  |  | 435 |
Asset impairments |  |  | — |  |  |  | 90 |  |  |  | — |  |  |  | 90 |
Restructuring charges |  |  | — |  |  |  | — |  |  |  | 2 |  |  |  | 10 |
Interest income |  |  | — |  |  |  | — |  |  |  | 1 |  |  |  | — |
Interest expense |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (4 | )
Other income (expense), net |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (1 | )
Net (increase) reduction of loss on discontinued operations held for sale |  |  | — |  |  |  | (155 | ) |  |  | 45 |  |  |  | (155 | )
Net gain on sale of discontinued operations |  |  | 1 |  |  |  | — |  |  |  | 4 |  |  |  | — |
Income tax expense (benefit) |  |  | 4 |  |  |  | (126 | ) |  |  | 7 |  |  |  | (123 | )
Discontinued operations, net of tax |  | $ | (6 | ) |  | $ | (137 | ) |  | $ | 38 |  |  | $ | (175 | )
As disclosed in the Company’s 2016 Form 10-K, in December 2016 while preparing for and performing the controls associated with the disposition of the Company’s European Business, the Company identified an error relating to the third quarter of 2016 that was not considered to be material. When the Company committed to a plan to sell substantially all of the business formerly reported as the International Operations, it provided reference to the cumulative translation adjustment (“CTA”) balance that existed at the end of the third quarter of 2016, but did not include CTA in its impairment analysis. As a result, the loss amount of Discontinued operations, net of tax was overstated in the third quarter of 2016. In the September 30, 2017 Condensed Consolidated Financial Statements, the prior quarter financial information has been revised due to the correction of the error. Additionally, this correcting adjustment is provided below and impacts the same captioned line items in various disclosures of the third quarter financial statements by the same amount.
|  | Third Quarter 2016 |  |  | Year-to-Date Third Quarter 2016 |
($ in Millions, except per share) |  | As Reported |  |  | Adjustment |  |  | As Corrected |  |  | As Reported |  |  | Adjustment |  |  | As Corrected |
Discontinued operations, net of tax |  | $ | (286 | ) |  | $ | 149 |  |  | $ | (137 | ) |  | $ | (324 | ) |  | $ | 149 |  |  | $ | (175 | )
Net income |  | $ | 44 |  |  | $ | 149 |  |  | $ | 193 |  |  | $ | 300 |  |  | $ | 149 |  |  | $ | 449 |
Basic earnings (loss) per share |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Discontinued operations |  | $ | (0.54 | ) |  | $ | 0.28 |  |  | $ | (0.26 | ) |  | $ | (0.60 | ) |  | $ | 0.28 |  |  | $ | (0.32 | )
Net earnings |  | $ | 0.08 |  |  | $ | 0.28 |  |  | $ | 0.36 |  |  | $ | 0.55 |  |  | $ | 0.27 |  |  | $ | 0.82 |
Diluted earnings per share |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Discontinued operations |  | $ | (0.54 | ) |  | $ | 0.29 |  |  | $ | (0.25 | ) |  | $ | (0.60 | ) |  | $ | 0.28 |  |  | $ | (0.32 | )
Net earnings |  | $ | 0.08 |  |  | $ | 0.27 |  |  | $ | 0.35 |  |  | $ | 0.54 |  |  | $ | 0.27 |  |  | $ | 0.81 |
Assets and liabilities of discontinued operations presented in the Condensed Consolidated Balance Sheets as of September 30, 2017, and December 31, 2016, are included in the following table. As the sale of the European Business was completed before year-end 2016, the assets and liabilities of that business are not included in either period presented below. Additionally, the sale of the South Korean and mainland China businesses were completed in April 2017 and July 2017, respectively, and therefore the assets and liabilities of those businesses are not included in the September 30, 2017 period presented below.
(In millions) |  | September 30, 2017 |  |  | December 31, 2016 |
Assets |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 36 |  |  | $ | 44 |
Receivables, net |  |  | 55 |  |  |  | 88 |
Inventories |  |  | 67 |  |  |  | 82 |
Prepaid expenses and other current assets |  |  | 5 |  |  |  | 4 |
Property and equipment, net |  |  | 31 |  |  |  | 31 |
Other assets |  |  | 2 |  |  |  | 6 |
Valuation allowance |  |  | (55 | ) |  |  | (113 | )
Current assets of discontinued operations |  | $ | 141 |  |  | $ | 142 |
Liabilities |  |  |  |  |  |  |  |
Trade accounts payable |  | $ | 43 |  |  | $ | 60 |
Accrued expenses and other current liabilities |  |  | 20 |  |  |  | 27 |
Income taxes payable |  |  | — |  |  |  | 2 |
Short-term borrowings and current maturities of long-term debt |  |  | — |  |  |  | 9 |
Deferred income taxes and other long-term liabilities |  |  | 5 |  |  |  | 6 |
Current liabilities of discontinued operations |  | $ | 68 |  |  | $ | 104 |

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- Definition The entire disclosure related to a disposal group. Includes, but is not limited to, a discontinued operation, disposal classified as held-for-sale or disposed of by means other than sale or disposal of an individually significant component. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 360 -URI http://asc.fasb.org/topic&trid=2155823 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 205 -SubTopic 20 -URI http://asc.fasb.org/subtopic&trid=2122178 + Details
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