NOTE 3. 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 11, 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 the first half of 2017, which includes a $1 million reduction in the loss on sale during the second quarter of 2017 related to the finalization of the working capital adjustment, as discussed below. These amounts 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 July 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 up to 24 months following the closing date under a separate agreement. The proceeds and related costs from these services are presented in Other 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 has been classified 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 announced on April 7, 2017, 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 the Net gain on sale of discontinued operations in the table below.

China

The sale of the Company’s business in mainland China announced on June 2, 2017 was completed on July 28, 2017. The transaction was structured and accounted for as an equity sale. The Company may provide certain transitional services to the purchaser for a limited period of time following the closing. The Company recorded a reduction of $1 million and $10 million in the second quarter and first half of 2017, respectively, to its carrying amount of its China Business based on its updated estimates of fair value less cost to sell. The adjustments are included in the net (increase) reduction of loss on discontinued operations held for sale in the table below.

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 accounted for as an equity sale, and is expected to close within the next several months, subject to the purchaser obtaining necessary regulatory approval. The Company recorded adjustments of $2 million and $58 million in the second quarter and first half of 2017, respectively, 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. 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.

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.

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.


	Second Quarter						First Half
(In millions)	2017			2016			2017		2016
Sales	$	119		$	635		$	287	$	1,303
Cost of goods sold and occupancy costs		97			501			233		1,027
Operating expenses		26			146			52		296
Restructuring charges		1			6			2		11
Interest income		—			—			—		1
Interest expense		—			(2	)		—		(4	)
Net (increase) reduction of loss on discontinued operations held for sale		(2	)		—			45		—
Net gain on sale of discontinued operations		13			—			3		—
Income tax expense		3			2			3		4

Discontinued operations, net of tax	$	3		$	(22	)	$	45	$	(38	)

Assets and liabilities of discontinued operations presented in the Condensed Consolidated Balance Sheets as of July 1, 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 business was completed in April 2017, and therefore the assets and liabilities of that business are not included in the July 1, 2017, period presented below.


(In millions)	July 1, 2017			December 31, 2016
Assets
Cash and cash equivalents	$	57		$	44
Receivables, net		68			88
Inventories		56			82
Prepaid expenses and other current assets		3			4
Property and equipment, net		31			31
Other assets		3			6
Valuation allowance		(65	)		(113	)

Current assets of discontinued operations	$	153		$	142

Liabilities
Trade accounts payable	$	42		$	60
Accrued expenses and other current liabilities		21			27
Income taxes payable		1			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	$	69		$	104