Staples 2012 Annual Report Download - page 126

C-14
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
across the Company and to reposition its operations and stem losses in Europe. In connection with the development of this plan,
the Company analyzed each of its European businesses in light of ongoing industry trends, economic conditions, and long-term
sales and profit projections. The Company's management and board of directors concluded a strategic shift in the business was
crucial to Staples' long-term business prospects in Europe. As a result, the Company made strategic decisions and announced a
plan to restructure the Company's operations in Europe (see Note B - Restructuring Charges), divest its printing systems division
and more fully integrate its retail and online offerings.
The outcome of this strategic review in the third quarter was significant changes in the long-range financial projections
for Europe Retail and Europe Catalog compared with previous projections. The Company now projects long-term sales declines
in its Europe Retail business, stemming from a decision, in light of industry trends, to allocate more resources and capital to the
expansion of online capabilities. The Company also projects declines in its legacy Europe Catalog business, which is projected
to be replaced with the growing, but slightly less profitable, online business. Based on the results of the impairment testing, the
Company recorded impairment charges of $303.3 million and $468.1 million related to Europe Retail and Europe Catalog in the
third quarter 2012, respectively.
To derive the fair value of these reporting units, the Company used the income approach, specifically the discounted cash
flow ("DCF") method, which incorporates significant estimates and assumptions made by management which, by their nature, are
characterized by uncertainty. The key assumptions impacting the valuation included:
 The Company's financial projections for these reporting units, which are based on management's assessment of regional
and macroeconomic variables, industry trends and market opportunities, and the Company's strategic objectives and future
growth plans.
 The projected terminal value for each reporting unit, which represents the present value of projected cash flows beyond
the last period in the discounted cash flow analysis. The terminal value reflects the Company's assumptions related to
long-term growth rates and profitability, which are based on several factors including local and macroeconomic variables,
market opportunities, and future growth plans.
 The discount rate used to measure the present value of the projected future cash flows is set using a weighted-average
cost of capital method that considers market and industry data as well as the Company's specific risk factors that are likely
to be considered by a market participant. The weighted-average cost of capital is the Company's estimate of the overall
after-tax rate of return required by equity and debt holders of a business enterprise.
Based on the results of the first step in the impairment test, the Company determined that the carrying values of Europe Retail and
Europe Catalog exceeded their respective fair values, and accordingly, the Company proceeded to step two of the impairment test.
In the second step, the Company assigned the reporting unit's fair value to all of its assets and liabilities, including any
unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as
if the reporting unit was being acquired in a business combination. If the implied fair value of the reporting unit's goodwill is less
than the carrying value, the difference is recorded as an impairment charge. The fair value estimates incorporated in step two were
primarily based on third-party appraisals and the income approach, specifically the relief from royalty and the multi-period excess
earnings methods. The property appraisals incorporate a significant amount of judgment on the part of the third-party valuation
specialists regarding appropriate comparable properties and assessments of current market conditions, and the income approach
valuations incorporate significant estimates and assumptions made by management including those relating to projected long-term
rates of growth, customer attrition, and profitability, appropriate market-based royalty rates and the discount rates. Based on the
results of this second step, the Company recorded impairment charges of $303.3 million related to Europe Retail and $468.1 million
related to Europe Catalog during the third quarter of 2012.
During the fourth quarter of 2012, the Company performed its annual goodwill impairment testing, and determined that
no further impairment charges were required in 2012. The Company determined the fair value of its reporting units during this
testing using the DCF method, as described above.