Investing Red Flags: 2 Companies Reporting Material Impairments

(Written by Alexander Crawford)

For up-to-date information on a company, it’s best to go straight to the source. One of the best sources is regulatory filings with the SEC, such as the form 8-K, which companies use to report material events that may impact investors.

In most cases, companies have four business days to file a Form 8-K from the specified event, which can be triggered by accounting adjustments, new financial obligations, and changes in executive management, among other changes.

Material Impairments

Here we focused on Item 2.06: Material Impairments. A company uses this filing to report that it plans to write down the value of an asset held on its balance sheet. This can occur for many reasons, some harmless and some more worrisome.

For instance, a company may write down the value of its equipment, a large contract, or its goodwill. It’s important to ask “why?” when looking at companies that are reporting significant impairments of its assets.

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To illustrate this idea, we ran a screen on the companies issuing form 8-K 2.06 over the last week.


Use the Turbo Chart to Compare the Performance of the First Two Companies in the List to the S&P 500:

Do you think these impairments are cause for concern?

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1. Computer Sciences Corporation (CSC): Provides information technology (IT) and professional services to governments and commercial enterprises. Market cap of $3.67B. The company filed a form 8K Item 2.06: Material Impairments on 01-02. For a closer look click here. The company reported that it will recognise a material impact in its contract value with the U.K. National Health Service for “deploying an integrated electronic patient records system” for the third quarter of 2012, but the amount of impairment is not yet known. The contract value as of November 30, 2011 was $1.5 billion.

2. Sears Holdings Corporation (SHLD): Operates as a retailer in the United States and Canada. Market cap of $3.40B. The company filed a form 8K Item 2.06: Material Impairments on 01-02. For a closer look click here. The company reported that it expects a non-cash charge in the fourth quarter of 2011 related to a valuation allowance of $1.6 to $1.8 billion on deferred tax assets. Based on earnings results to date, the company “can no longer assume future income sufficient to allow it to report the full value of its deferred tax assets.” The company also reported it may recognise an impairment on goodwill in the fourth quarter for as much as $600 million.

Interactive Chart: Press Play to see how analyst ratings have changed for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.