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.
In the third quarter of 2012, the Company determined that indicators of impairment existed for the goodwill related to its Europe Retail and Europe Catalog reporting units, both of which are included in the Company's International Operations segment. These indicators included political and economic instability in Europe, declining sales and profits, a sustained decline of the Company’s stock price, and revised outlooks for its European businesses. In September 2012, management presented, and the Board of Directors approved, a strategic plan to accelerate growth 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 was significant changes in the long-range financial projections for Europe Retail and Europe Catalog compared with previous projections. The revised projections reflected long-term sales declines for Europe Retail, stemming from a decision, in light of industry trends, to allocate more resources and capital to the expansion of online capabilities. The revised projections also reflected declines in the Company's European catalog business, which is projected to be replaced with the growing, but less profitable, online business.
To derive the fair value of these reporting units in step one of the impairment test, the Company used the income approach, specifically the discounted cash flow ("DCF") method. Based on the results of this first step, 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. 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 quarters of 2012 and 2013, the Company performed its annual goodwill impairment testing, and determined that no further impairment charges were required at those times.
The changes in the carrying amounts of goodwill during fiscal 2012 and 2013 are as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Goodwill
at January 28, 2012 | | 2012 Impairment Charges | | 2012 Adjustments | | Foreign
Exchange
Fluctuations | | Goodwill
at February 2, 2013 |
North American Commercial | | $ | 1,245,034 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,245,034 |
|
North American Stores & Online | | 629,554 |
| | — |
| | (3,103 | ) | | 222 |
| | 626,673 |
|
International Operations | | 2,107,542 |
| | (771,493 | ) | | (414 | ) | | 13,820 |
| | 1,349,455 |
|
Consolidated | | $ | 3,982,130 |
| | $ | (771,493 | ) | | $ | (3,517 | ) | | $ | 14,042 |
| | $ | 3,221,162 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Goodwill
at February 2, 2013 | | 2013 Additions | | 2013 Adjustments | | Held for Sale | | Foreign
Exchange
Fluctuations | | Goodwill
at February 1, 2014 |
North American Commercial | | $ | 1,245,034 |
| | $ | 18,377 |
| | $ | (5,462 | ) | | $ | (11,163 | ) | | $ | — |
| | $ | 1,246,786 |
|
North American Stores & Online | | 626,673 |
| | 15,945 |
| | — |
| | — |
| | (4,593 | ) | | 638,025 |
|
International Operations | | 1,349,455 |
| | — |
| | — |
| | — |
| | (669 | ) | | 1,348,786 |
|
Consolidated | | $ | 3,221,162 |
| | $ | 34,322 |
| | $ | (5,462 | ) | | $ | (11,163 | ) | | $ | (5,262 | ) | | $ | 3,233,597 |
|
As of February 1, 2014, the Company has taken $771.5 million of accumulated goodwill impairment charges.
Long-Lived Assets
Prior to performing the goodwill impairment tests for Europe Retail and Europe Catalog in the third quarter of 2012, the Company tested long-lived assets to be held and used by these reporting units for impairment on an undiscounted cash flow basis. Based on the results of this testing, the Company recorded a $4.8 million impairment charge related to the ongoing operations of Europe Retail and determined that the long-lived assets associated with the ongoing operations of Europe Catalog were not impaired. The impairment charge primarily related to leasehold improvements at retail stores and was based on estimates of the fair values of the related assets which were derived using a DCF valuation analysis, incorporating similar assumptions and estimates as discussed above.
During 2012, the Company closed 46 retail stores in Europe and 15 retail stores in the United States and consolidated several sub-scale delivery businesses in Europe (see Note B - Restructuring Charges). As a result of these actions, the Company recorded long-lived asset impairment charges of $29.6 million and $5.1 million related to the Company's International Operations and North American Stores and Online segments, respectively, primarily relating to leasehold improvements and company-owned facilities.
See Note G - Fair Value Measurements for disclosures related to fair value measurements incorporated in the calculations of the goodwill and long-lived asset impairment charges.
Also during 2012, the Company rebranded its Australian business, a component of the Company's International Operations segment, pursuant to which the Company accelerated the transition from the legacy Corporate Express tradename to the exclusive use of the Staples brand name. As a result, the Company accelerated the remaining amortization totaling $20.0 million in 2012. This amount was recorded in Amortization of intangibles in the consolidated statement of income. Prior to the decision to rebrand this business, the carrying value of the tradename was scheduled to be amortized through the end of the Company's fiscal year 2014.
The Company's intangible assets are amortized on a straight-line basis over their estimated useful lives and are summarized below (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Weighted
Average
Amortization
Period | | February 1, 2014 | | February 2, 2013 |
| | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net |
Customer relationships | | 12.2 years | | $ | 686,399 |
| | $ | (357,239 | ) | | $ | 329,160 |
| | $ | 680,846 |
| | $ | (305,245 | ) | | $ | 375,601 |
|
Technology | | 5.0 years | | 48,193 |
| | (862 | ) | | 47,331 |
| | — |
| | — |
| | — |
|
Tradenames | | 16.0 years | | 204,598 |
| | (198,389 | ) | | 6,209 |
| | 208,449 |
| | (199,441 | ) | | 9,008 |
|
Total | | 11.8 years | | $ | 939,190 |
| | $ | (556,490 | ) | | $ | 382,700 |
| | $ | 889,295 |
| | $ | (504,686 | ) | | $ | 384,609 |
|
Estimated future amortization expense associated with the intangible assets at February 1, 2014 is as follows (in thousands):
|
| | | | |
Fiscal Year | | Total |
2014 | | $ | 59,767 |
|
2015 | | 63,114 |
|
2016 | | 61,617 |
|
2017 | | 61,278 |
|
2018 | | 57,694 |
|
Thereafter | | 79,230 |
|
| | $ | 382,700 |
|
