ACQUISITIONS, DIVESTITURES, GOODWILL AND INTANGIBLE ASSETS
Acquisitions and Divestitures
We did not acquire any businesses in 2013.
In 2012, we acquired seven businesses for an aggregate of $444, funded by cash on hand:
Aerospace
| |
• | A fixed-base operator at Houston Hobby Airport that provides fuel, catering, maintenance, repair and overhaul services to private aircraft (on February 29). |
Combat Systems
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• | The defense operations of Gayston Corporation, a business that supplies precision metal components used in several munitions programs (on August 27). |
Marine Systems
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• | The Ship Repair and Coatings Division of Earl Industries, an East Coast ship-repair company that supports the U.S. Navy fleet in Norfolk, Virginia, and Mayport, Florida (on July 31). |
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• | Applied Physical Sciences Corp., a provider of applied submarine research and development services (on December 21). |
Information Systems and Technology
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• | IPWireless, Inc., a provider of 3G and 4G Long Term Evolution (LTE) wireless broadband network equipment and solutions for public safety and military customers (on June 8). |
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• | Open Kernel Labs, Inc., a provider of virtualization software for securing wireless communications, applications and content for mobile devices and automotive in-vehicle infotainment systems (on August 17). |
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• | Fidelis Security Systems, Inc., a company that provides cyber security tools that offer real-time network visibility and analysis (on August 27). |
In 2011, we acquired six businesses for an aggregate of $1.6 billion, funded by cash on hand:
Combat Systems
| |
• | Force Protection, Inc., a provider of wheeled vehicles, survivability solutions and vehicle sustainment services for the armed forces of the United States and its allies (on December 19). |
Marine Systems
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• | Metro Machine Corp., a surface-ship repair business in Norfolk, Virginia, that supports the U.S. Navy fleet (on October 31). |
Information Systems and Technology
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• | A provider of enterprise services and cloud computing to the U.S. Department of Defense (on July 15). |
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• | A provider of secure wireless networking equipment for the U.S. military and other government customers (on July 22). |
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• | A provider of information assurance and security software (on August 12). |
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• | Vangent, Inc., a provider of health information technology services and business systems to federal agencies (on September 30). |
The operating results of these acquisitions have been included with our reported results since their respective closing dates. The purchase prices of these acquisitions have been allocated to the estimated fair value of net tangible and intangible assets acquired, with any excess purchase price recorded as goodwill.
In 2011, we sold a business in our Combat Systems group. The pretax gain of $38 on the sale was reported in other income in the Consolidated Statements of Earnings (Loss). The proceeds from the sale are included in other investing activities on the Consolidated Statements of Cash Flows.
Goodwill
The changes in the carrying amount of goodwill by reporting unit during 2012 and 2013 were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Aerospace | | Combat Systems | | Marine Systems | | Information Systems and Technology | | Total Goodwill |
December 31, 2011 | $ | 2,644 |
| | $ | 2,839 |
| | $ | 229 |
| | $ | 7,864 |
| | $ | 13,576 |
|
Impairment | — |
| | — |
| | — |
| | (1,994 | ) | | (1,994 | ) |
Acquisitions (a) | 11 |
| | 86 |
| | 61 |
| | 221 |
| | 379 |
|
Other (b) | 42 |
| | 36 |
| | — |
| | 9 |
| | 87 |
|
December 31, 2012 | $ | 2,697 |
| | $ | 2,961 |
| | $ | 290 |
| | $ | 6,100 |
| | $ | 12,048 |
|
Acquisitions (a) | — |
| | 2 |
| | (1 | ) | | 1 |
| | 2 |
|
Other (b) | 44 |
| | (69 | ) | | — |
| | (48 | ) | | (73 | ) |
December 31, 2013 | $ | 2,741 |
| | $ | 2,894 |
| | $ | 289 |
| | $ | 6,053 |
| | $ | 11,977 |
|
(a)Includes adjustments during the purchase price allocation period.
(b)Consists primarily of adjustments for foreign currency translation and allocations of goodwill associated with asset sales.
We completed the required annual goodwill impairment test as of December 31, 2013. The first step of the goodwill impairment test compares the fair values of our reporting units to their carrying values. Our reporting units are consistent with our business groups. We estimate the fair values of our reporting units primarily based on the discounted projected cash flows of the underlying operations. For our Aerospace, Combat Systems and Marine Systems reporting units, the estimated fair values were at least double their respective carrying values as of December 31, 2013. The fair value of our Information Systems and Technology reporting unit, for which we recorded a goodwill impairment in 2012 discussed below, exceeded its carrying value by a smaller margin of approximately 15 percent. While the projected cash flows have not changed materially from 2012, the carrying value of the reporting unit has increased, largely due to improvement in the funded status of the unit’s defined-benefit retirement plans (see Note P for a discussion of our defined-benefit retirement plans). The reporting unit remains at risk for a future goodwill impairment should there be further significant increases in the carrying value of the reporting unit or deterioration in the projected cash flows.
In 2012, we recorded a $2 billion goodwill impairment in the Information Systems and Technology reporting unit. Revenue pressure from slowed defense spending and the threat of sequestration and margin compression due to mix shift impacted operating results and tempered the projected cash flows of the reporting unit, which negatively impacted our estimate of its fair value. Because step one of the impairment test concluded that the carrying value of the reporting unit exceeded its estimated fair value, we performed the second step of the test to measure the amount of the impairment loss, if any. The second step requires the allocation of the reporting unit’s fair value to its assets and liabilities, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill is less than the carrying value, the difference is recorded as an impairment loss. Prior to December 31, 2012, we had no accumulated impairment losses.
Intangible Assets
Intangible assets consisted of the following:
|
| | | | | | | | | | | | | | | | | | | |
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount |
| December 31, 2012 | | December 31, 2013 |
Contract and program intangible assets* | $ | 2,066 |
| $ | (1,165 | ) | $ | 901 |
| | $ | 2,042 |
| $ | (1,273 | ) | $ | 769 |
|
Trade names and trademarks | 494 |
| (87 | ) | 407 |
| | 507 |
| (103 | ) | 404 |
|
Technology and software | 180 |
| (108 | ) | 72 |
| | 140 |
| (97 | ) | 43 |
|
Other intangible assets | 175 |
| (172 | ) | 3 |
| | 155 |
| (154 | ) | 1 |
|
Total intangible assets | $ | 2,915 |
| $ | (1,532 | ) | $ | 1,383 |
| | $ | 2,844 |
| $ | (1,627 | ) | $ | 1,217 |
|
* Consists of acquired backlog and probable follow-on work and related customer relationships.
We did not recognize any impairments of our intangible assets in 2013. As a result of lower revenues throughout 2013, we reviewed the long-lived assets of our axle business in the Combat Systems group for recoverability in 2013 prior to conducting step one of our goodwill impairment test. The margin by which the expected cash flows of the business exceeded its carrying value was approximately 10 percent. If future cash flows do not support the recovery of the business’ assets, we will be required to impair some or all of the long-lived assets, including specifically identified intangible assets of $175.
In 2012, we recognized impairments in our Aerospace and Information Systems and Technology groups of $191 and $110, respectively, on contract and program, and related technology, intangible assets for substantially all of their remaining values. These losses were reported in operating costs and expenses in the respective segments. In the Aerospace group, lower demand in our maintenance business at Jet Aviation caused by an increasingly competitive marketplace resulted in a review of the long-lived assets of the business. In the Information Systems and Technology group, 2012 competitive losses and award delays in our optical products business indicative of lower overall demand resulted in a review of the long-lived assets.
In 2011, losses on narrow- and wide-body commercial aircraft contracts and lower volume for business-jet aircraft manufactured by other OEMs triggered a review of the long-lived assets of the completions business in the Aerospace group, resulting in a $111 impairment of the contract and program intangible asset.
The amortization lives (in years) of our intangible assets on December 31, 2013, were as follows:
|
| | |
| | Range of |
| | Amortization Life |
Contract and program intangible assets | | 7-30 |
Trade names and trademarks | | 30 |
Technology and software | | 7-15 |
Other intangible assets | | 5 |
Amortization expense was $238 in 2011, $234 in 2012 and $163 in 2013. We expect to record annual amortization expense over the next five years as follows:
|
| | | |
2014 | $ | 141 |
|
2015 | 137 |
|
2016 | 110 |
|
2017 | 96 |
|
2018 | 86 |
|
