Staples 2015 Annual Report Download - page 132

APPENDIX C
C-15 STAPLES Form 10-K
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
NOTE C — GOODWILL AND LONG-LIVED ASSETS
Goodwill
As described in Note A - Summary of Significant Accounting
Policies, the Company reviews goodwill for impairment
annually during its fourth fiscal quarter and whenever events
or changes in circumstances indicate the carrying value of
goodwill may not be recoverable. During the fourth quarter of
2015, the Company performed its annual goodwill impairment
testing, and determined that no impairment charges
were required.
As of January 30, 2016, the Company’s Europe Online, China,
and Australia reporting units continue to be at an increased
risk for future impairment charges. These reporting units have
associated goodwill balances as of that date of $266 million,
$76 million, and $49 million, respectively. Europe Online has
experienced ongoing challenges transitioning from its legacy
catalog business model to an online model. As noted below,
in 2014 the Company recorded goodwill impairment charges
related to China and Australia. While China and Australia
experienced improved sales and profitability in 2015, the
valuations for these reporting units are predicated on continued
improvement in the future.
In 2014 the Company recorded goodwill impairment charges
of $410 million, including $280 million related to Australia,
$116 million related to China, and $13 million related to
South America. These reporting units are components of the
Company’s International Operations segment. The factors
underlying the impairment charges included:
• Australia experienced unusually high customer attrition in
2011 and 2012, and operating challenges continued in
2013 and 2014.
• China experienced weaker than expected sales growth
in 2013. In 2014, sales declined as the business decided
to exit certain unprofitable arrangements, and growth in
ecommerce sales was not sufficient to offset the loss of
these arrangements.
• South America also experienced weaker than
expected growth.
In the first step of the impairment test, the Company measured
the fair value of these reporting units using the income
approach, specifically the discounted cash flow (“DCF”)
method. In conjunction with the Company’s annual cycle
for planning and budgeting, in the fourth quarter of 2014 the
Company updated its fiscal 2015 and long-term financial
projections for its reporting units. Based on these updates,
the Company reflected lower long-term sales growth and profit
rate projections in the DCF valuations for these reporting units.
As a result, these three reporting units failed step one of the
impairment test.
In the second step of the impairment test, the Company
assigned the reporting units’ fair values to their individual assets
and liabilities, including any unrecognized assets or liabilities, 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 the income approach, specifically the multi-period excess
earnings method.
The valuation methodologies used to measure the impairment
charges incorporated unobservable inputs reflecting
significant estimates and assumptions made by management.
Accordingly, the Company classified these measurements
as Level 3 within the fair value hierarchy. Key inputs included
expected sales growth rates, customer attrition rates,
operating income margins, market-based royalty rates, and
discount rates.
The changes in the carrying amounts of goodwill during fiscal
2014 and 2015 are as follows (in millions):
Goodwill
at February 1, 2014 2014 Additions 2014 Impairments 2014 Disposals
Foreign
Exchange
Fluctuations Goodwill at January 31, 2015
North American Commercial $1,247 $2 $— $(2) $— $1,247
North American Stores & Online 638 34 — — (10) 662
International Operations 1,349 — (410) (2) (166) 771
Consolidated $3,234 $36 $(410) $(4) $(176) $2,680
Goodwill
at January 31, 2015 2015 Additions 2015 Impairments 2015 Disposals
Foreign
Exchange
Fluctuations Goodwill at January 30, 2016
North American Commercial $1,247 $3 $— $— $— $1,250
North American Stores & Online 662 1 — — (6) 657
International Operations 771 3 — — (28) 746
Consolidated $2,680 $7 $— $— $(34) $2,653