Northrop Grumman M&A Leads to $3B Charge

Defense contractor, citing impairment from deals in 2001 and 2002, joins growing list of companies taking large noncash writedowns. So does Fifth T...
Roy Harris and Stephen TaubJanuary 22, 2009

Northrop Grumman Corp. joined the growing list of companies reporting large noncash charges to reflect goodwill impairment. The defense contractor and maker of the B-2 bomber said it would record a fourth-quarter after-tax charge of $3 billion to $3.4 billion, reflecting acquisitions made in 2001 and 2002.

While the company didn’t mention acquisitions that may have led to writedowns, its largest deals in 2001 were for Litton Industries and Newport News Shipbuilding, and in 2002 it purchased TRW Inc. Consolidation across the defense industry was at a peak then.

Northrop Grumman did note that testing as of Nov. 30 indicated that book values for Shipbuilding and Space Technology exceeded the fair values of these businesses. It said that the charge is primarily driven by adverse equity market conditions that caused a decrease in current market multiples and the company’s stock price as of Nov. 30, 2008, compared with testing performed the prior year.

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The testing, conducted in accordance with Statement of Financial Accounting Standards 142, Goodwill and Other Intangible Assets, used a discounted cash flow analysis supported by comparative market multiples to determine the fair values of its businesses versus their book values, it explained.

In other writedowns, Fifth Third Bancorp said it took a noncash, pre-tax charge of $965 million in the fourth quarter to record the impairment of goodwill. That charge resulted from goodwill impairment testing that was performed at the end of the fourth quarter, reflecting the decline in the stock price during the quarter and the resulting difference between market capitalization and book value of the Bancorp.

The results of the bank’s goodwill impairment testing showed that the estimated fair values of certain of its reporting units were less than their book values, resulting in this charge. It did not provide more specific details. However, it had very acquisitive over the past few years.

“The goodwill impairment charge of $965 million did not significantly affect our capital ratios as goodwill is excluded from these ratios by definition,” the struggling bank said.

Earlier this week, a $6 billion writedown reflecting noncash impairment of asset values was reported by Regions Financial, with a $1.1-billion amount written down by UnitedRentals Inc., and much-smaller writedowns taken by .H.B. Fuller Co. and OfficeMax.