Caterpillar Inc. (CAT) | Goodwill and Intangible Assets

Goodwill and Intangible Assets Accounting Policy

Amortization

Amortization of purchased finite-lived intangibles is computed principally using the straight-line method, generally not to exceed a period of 20 years.

Goodwill

For acquisitions accounted for as a business combination, goodwill represents the excess of the cost over the fair value of the net assets acquired. Caterpillar is required to test goodwill for impairment, at the reporting unit level, annually and when events or circumstances indicate the fair value of a reporting unit may be below its carrying value. A reporting unit is an operating segment or one level below an operating segment (referred to as a component) to which goodwill is assigned when initially recorded. Caterpillar assigns goodwill to reporting units based on integration plans and the expected synergies resulting from the acquisition. Because Caterpillar is a highly integrated company, the businesses Caterpillar acquires are sometimes combined with or integrated into existing reporting units. When changes occur in the composition of Caterpillar's operating segments or reporting units, goodwill is reassigned to the affected reporting units based on their relative fair values.

Caterpillar tests goodwill for impairment annually and whenever events or circumstances make it more likely than not that an impairment may have occurred. Caterpillar performs annual goodwill impairment test as of October 1 and monitors for interim triggering events on an ongoing basis. Goodwill is reviewed for impairment utilizing a qualitative assessment or a two-step process. Caterpillar has an option to make a qualitative assessment of a reporting unit's goodwill for impairment. If Caterpillar chooses to perform a qualitative assessment and determine the fair value more likely than not exceeds the carrying value, no further evaluation is necessary. For reporting units where Caterpillar performs the two-step process, the first step requires to compare the fair value of each reporting unit, which Caterpillar primarily determines using an income approach based on the present value of discounted cash flows, to the respective carrying value, which includes goodwill. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired. If the carrying value is higher than the fair value, there is an indication that an impairment may exist and the second step is required. In step two, the implied fair value of goodwill is calculated as the excess of the fair value of a reporting unit over the fair values assigned to its assets and liabilities. If the implied fair value of goodwill is less than the carrying value of the reporting unit's goodwill, the difference is recognized as an impairment loss.

Source: Caterpillar Inc., Annual Report

Goodwill and Intangible Assets Disclosure

Caterpillar Inc., Statement of Financial Position, Goodwill and Intangible Assets

USD $ in millions

	Dec 31, 2012	Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008
Customer relationships	2,756	2,811	630	396	397
Intellectual property	1,767	1,794	306	211	211
Other	299	299	197	130	112
Finite-lived intangible assets, gross carrying amount	4,822	4,904	1,133	737	720
Accumulated amortization	(824)	(554)	(346)	(272)	(209)
Finite-lived intangible assets, net	3,998	4,350	787	465	511
In-process research & development	18	18	18	–	–
Indefinite-lived intangible assets	18	18	18	–	–
Intangible assets	4,016	4,368	805	465	511
Goodwill	6,942	7,080	2,614	2,269	2,261
Intangible assets and goodwill	10,958	11,448	3,419	2,734	2,772

Source: Based on data from Caterpillar Inc. Annual Reports

Item	Description	The company
Intangible assets	Sum of the carrying amounts of all intangible assets, excluding goodwill, as of the balance sheet date, net of accumulated amortization and impairment charges.	Caterpillar Inc.'s intangible assets increased from 2010 to 2011 but then slightly declined from 2011 to 2012.
Goodwill	Carrying amount as of the balance sheet date, which is the cumulative amount paid and (if applicable) the fair value of any noncontrolling interest in the acquiree, adjusted for any amortization recognized prior to the adoption of any changes in generally accepted accounting principles (as applicable) and for any impairment charges, in excess of the fair value of net assets acquired in one or more business combination transactions.	Caterpillar Inc.'s goodwill increased from 2010 to 2011 but then slightly declined from 2011 to 2012.
Intangible assets and goodwill	Sum of the carrying amounts of all intangible assets, including goodwill, as of the balance sheet date, net of accumulated amortization and impairment charges.	Caterpillar Inc.'s intangible assets and goodwill increased from 2010 to 2011 but then slightly declined from 2011 to 2012.

Analyst Adjustments: Removal of Goodwill

Caterpillar Inc., adjustments to financial data

USD $ in millions

	Dec 31, 2012	Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008
Adjustment to Total Assets
Total assets (as reported)	89,356	81,446	64,020	60,038	67,782
Less: Goodwill	6,942	7,080	2,614	2,269	2,261
Total assets (adjusted)	82,414	74,366	61,406	57,769	65,521
Adjustment to Equity Attributable To Common Stockholders
Equity attributable to common stockholders (as reported)	17,532	12,883	10,824	8,740	6,087
Less: Goodwill	6,942	7,080	2,614	2,269	2,261
Equity attributable to common stockholders (adjusted)	10,590	5,803	8,210	6,471	3,826
Adjustment to Profit Attributable To Common Stockholders
Profit attributable to common stockholders (as reported)	5,681	4,928	2,700	895	3,557
Add: Goodwill impairment charge	580	–	–	22	–
Profit attributable to common stockholders (adjusted)	6,261	4,928	2,700	917	3,557

Adjusted Ratios: Removal of Goodwill (Summary)

Caterpillar Inc., adjusted ratios

	Dec 31, 2012	Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008
Net Profit Margin
Reported net profit margin	8.62%	8.19%	6.34%	2.76%	6.93%
Adjusted net profit margin	9.50%	8.19%	6.34%	2.83%	6.93%
Total Asset Turnover
Reported total asset turnover	0.74	0.74	0.67	0.54	0.76
Adjusted total asset turnover	0.80	0.81	0.69	0.56	0.78
Financial Leverage
Reported financial leverage	5.10	6.32	5.91	6.87	11.14
Adjusted financial leverage	7.78	12.82	7.48	8.93	17.13
Return on Equity (ROE)
Reported ROE	32.40%	38.25%	24.94%	10.24%	58.44%
Adjusted ROE	59.12%	84.92%	32.89%	14.17%	92.97%
Return on Assets (ROA)
Reported ROA	6.36%	6.05%	4.22%	1.49%	5.25%
Adjusted ROA	7.60%	6.63%	4.40%	1.59%	5.43%

Ratio	Description	The company
Adjusted net profit margin	An indicator of profitability, calculated as adjusted net income divided by revenue.	Caterpillar Inc.'s adjusted net profit margin improved from 2010 to 2011 and from 2011 to 2012.
Adjusted total asset turnover	An activity ratio calculated as total revenue divided by adjusted total assets.	Caterpillar Inc.'s adjusted total asset turnover improved from 2010 to 2011 but then slightly deteriorated from 2011 to 2012.
Adjusted financial leverage	A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity. Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.	Caterpillar Inc.'s adjusted financial leverage increased from 2010 to 2011 but then slightly declined from 2011 to 2012 not reaching 2010 level.
Adjusted ROE	A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity.	Caterpillar Inc.'s adjusted ROE improved from 2010 to 2011 but then slightly deteriorated from 2011 to 2012.
Adjusted ROA	A profitability ratio calculated as adjusted net income divided by adjusted total assets.	Caterpillar Inc.'s adjusted ROA improved from 2010 to 2011 and from 2011 to 2012.

Adjusted Net Profit Margin

	Dec 31, 2012	Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008
As Reported
Profit attributable to common stockholders (USD $ in millions)	5,681	4,928	2,700	895	3,557
Sales and revenues (USD $ in millions)	65,875	60,138	42,588	32,396	51,324

Net profit margin¹	8.62%	8.19%	6.34%	2.76%	6.93%
Adjusted for Goodwill
Adjusted profit attributable to common stockholders (USD $ in millions)	6,261	4,928	2,700	917	3,557
Sales and revenues (USD $ in millions)	65,875	60,138	42,588	32,396	51,324

Adjusted net profit margin²	9.50%	8.19%	6.34%	2.83%	6.93%

2012 Calculations

¹ Net profit margin = 100 × Profit attributable to common stockholders ÷ Sales and revenues
= 100 × 5,681 ÷ 65,875 = 8.62%

² Adjusted net profit margin = 100 × Adjusted profit attributable to common stockholders ÷ Sales and revenues
= 100 × 6,261 ÷ 65,875 = 9.50%

Ratio	Description	The company
Adjusted net profit margin	An indicator of profitability, calculated as adjusted net income divided by revenue.	Caterpillar Inc.'s adjusted net profit margin improved from 2010 to 2011 and from 2011 to 2012.

Adjusted Total Asset Turnover

	Dec 31, 2012	Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008
As Reported
Sales and revenues (USD $ in millions)	65,875	60,138	42,588	32,396	51,324
Total assets (USD $ in millions)	89,356	81,446	64,020	60,038	67,782

Total asset turnover¹	0.74	0.74	0.67	0.54	0.76
Adjusted for Goodwill
Sales and revenues (USD $ in millions)	65,875	60,138	42,588	32,396	51,324
Adjusted total assets (USD $ in millions)	82,414	74,366	61,406	57,769	65,521

Adjusted total asset turnover²	0.80	0.81	0.69	0.56	0.78

2012 Calculations

¹ Total asset turnover = Sales and revenues ÷ Total assets
= 65,875 ÷ 89,356 = 0.74

² Adjusted total asset turnover = Sales and revenues ÷ Adjusted total assets
= 65,875 ÷ 82,414 = 0.80

Ratio	Description	The company
Adjusted total asset turnover	An activity ratio calculated as total revenue divided by adjusted total assets.	Caterpillar Inc.'s adjusted total asset turnover improved from 2010 to 2011 but then slightly deteriorated from 2011 to 2012.

Adjusted Financial Leverage

	Dec 31, 2012	Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008
As Reported
Total assets (USD $ in millions)	89,356	81,446	64,020	60,038	67,782
Equity attributable to common stockholders (USD $ in millions)	17,532	12,883	10,824	8,740	6,087

Financial leverage¹	5.10	6.32	5.91	6.87	11.14
Adjusted for Goodwill
Adjusted total assets (USD $ in millions)	82,414	74,366	61,406	57,769	65,521
Adjusted equity attributable to common stockholders (USD $ in millions)	10,590	5,803	8,210	6,471	3,826

Adjusted financial leverage²	7.78	12.82	7.48	8.93	17.13

2012 Calculations

¹ Financial leverage = Total assets ÷ Equity attributable to common stockholders
= 89,356 ÷ 17,532 = 5.10

² Adjusted financial leverage = Adjusted total assets ÷ Adjusted equity attributable to common stockholders
= 82,414 ÷ 10,590 = 7.78

Ratio	Description	The company
Adjusted financial leverage	A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity. Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.	Caterpillar Inc.'s adjusted financial leverage increased from 2010 to 2011 but then slightly declined from 2011 to 2012 not reaching 2010 level.

Adjusted Return On Equity (ROE)

	Dec 31, 2012	Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008
As Reported
Profit attributable to common stockholders (USD $ in millions)	5,681	4,928	2,700	895	3,557
Equity attributable to common stockholders (USD $ in millions)	17,532	12,883	10,824	8,740	6,087

ROE¹	32.40%	38.25%	24.94%	10.24%	58.44%
Adjusted for Goodwill
Adjusted profit attributable to common stockholders (USD $ in millions)	6,261	4,928	2,700	917	3,557
Adjusted equity attributable to common stockholders (USD $ in millions)	10,590	5,803	8,210	6,471	3,826

Adjusted ROE²	59.12%	84.92%	32.89%	14.17%	92.97%

2012 Calculations

¹ ROE = 100 × Profit attributable to common stockholders ÷ Equity attributable to common stockholders
= 100 × 5,681 ÷ 17,532 = 32.40%

² Adjusted ROE = 100 × Adjusted profit attributable to common stockholders ÷ Adjusted equity attributable to common stockholders
= 100 × 6,261 ÷ 10,590 = 59%

Ratio	Description	The company
Adjusted ROE	A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity.	Caterpillar Inc.'s adjusted ROE improved from 2010 to 2011 but then slightly deteriorated from 2011 to 2012.

Adjusted Return On Assets (ROA)

	Dec 31, 2012	Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008
As Reported
Profit attributable to common stockholders (USD $ in millions)	5,681	4,928	2,700	895	3,557
Total assets (USD $ in millions)	89,356	81,446	64,020	60,038	67,782

ROA¹	6.36%	6.05%	4.22%	1.49%	5.25%
Adjusted for Goodwill
Adjusted profit attributable to common stockholders (USD $ in millions)	6,261	4,928	2,700	917	3,557
Adjusted total assets (USD $ in millions)	82,414	74,366	61,406	57,769	65,521

Adjusted ROA²	7.60%	6.63%	4.40%	1.59%	5.43%

2012 Calculations

¹ ROA = 100 × Profit attributable to common stockholders ÷ Total assets
= 100 × 5,681 ÷ 89,356 = 6.36%

² Adjusted ROA = 100 × Adjusted profit attributable to common stockholders ÷ Adjusted total assets
= 100 × 6,261 ÷ 82,414 = 7.60%

Ratio	Description	The company
Adjusted ROA	A profitability ratio calculated as adjusted net income divided by adjusted total assets.	Caterpillar Inc.'s adjusted ROA improved from 2010 to 2011 and from 2011 to 2012.