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Caterpillar Inc. (CAT)
Analysis of Goodwill and Intangible Assets
Difficulty: Advanced
- Goodwill and Intangible Assets Accounting Policy
- Goodwill and Intangible Assets Disclosure
- Analyst Adjustments: Removal of Goodwill
- Adjusted Ratios: Removal of Goodwill (Summary)
- Adjusted Net Profit Margin
- Adjusted Total Asset Turnover
- Adjusted Financial Leverage
- Adjusted Return on Equity (ROE)
- Adjusted Return on Assets (ROA)
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 make it more likely than not that an impairment may have occurred. 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 the 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 performs the annual goodwill impairment test as of October 1 and monitors for interim triggering events on an ongoing basis. Goodwill is reviewed for impairment utilizing either a qualitative assessment or a quantitative goodwill impairment test. If Caterpillar chooses to perform a qualitative assessment and determines the fair value more likely than not exceeds the carrying value, no further evaluation is necessary. For reporting units where Caterpillar performs the quantitative goodwill impairment test, Caterpillar compares 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. Beginning in 2017, if the carrying value is higher than the fair value, the difference would be recognized as an impairment loss. Prior to 2017, a two-step process was used. For reporting units where Caterpillar performed the two-step process, the first step required Caterpillar to compare the fair value of each reporting unit, which Caterpillar primarily determined 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 exceeded its carrying value, the goodwill was not considered impaired. If the carrying value was higher than the fair value, there was an indication that an impairment may have existed and the second step was required. In step two, the implied fair value of goodwill was 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 was less than the carrying value of the reporting unit’s goodwill, the difference was recognized as an impairment loss.
Source: 10-K (filing date: 2019-02-14).
Goodwill and Intangible Assets Disclosure
Caterpillar Inc., Statement of Financial Position, Goodwill and Intangible Assets
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Based on: 10-K (filing date: 2019-02-14), 10-K (filing date: 2018-02-15), 10-K (filing date: 2017-02-15), 10-K (filing date: 2016-02-16), 10-K (filing date: 2015-02-17).
| Item | Description | The company |
|---|---|---|
| Intangible assets, net | 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, net declined from 2016 to 2017 and from 2017 to 2018. |
| Goodwill | Amount after accumulated impairment loss of an asset representing future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. | Caterpillar Inc.’s goodwill increased from 2016 to 2017 and from 2017 to 2018. |
| 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 declined from 2016 to 2017 and from 2017 to 2018. |
Analyst Adjustments: Removal of Goodwill
Caterpillar Inc., adjustments to financial data
US$ in millions
Based on: 10-K (filing date: 2019-02-14), 10-K (filing date: 2018-02-15), 10-K (filing date: 2017-02-15), 10-K (filing date: 2016-02-16), 10-K (filing date: 2015-02-17).
Caterpillar Inc., Financial Data: Reported vs. Adjusted
Adjusted Ratios: Removal of Goodwill (Summary)
Caterpillar Inc., adjusted ratios
Based on: 10-K (filing date: 2019-02-14), 10-K (filing date: 2018-02-15), 10-K (filing date: 2017-02-15), 10-K (filing date: 2016-02-16), 10-K (filing date: 2015-02-17).
| 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 2016 to 2017 and from 2017 to 2018. |
| 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 2016 to 2017 and from 2017 to 2018. |
| 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 declined from 2016 to 2017 and from 2017 to 2018. |
| Adjusted ROE | A profitability ratio calculated as adjusted net income divided by adjusted shareholders’ equity. | Caterpillar Inc.’s adjusted ROE improved from 2016 to 2017 and from 2017 to 2018. |
| Adjusted ROA | A profitability ratio calculated as adjusted net income divided by adjusted total assets. | Caterpillar Inc.’s adjusted ROA improved from 2016 to 2017 and from 2017 to 2018. |
Caterpillar Inc., Ratios: Reported vs. Adjusted
Adjusted Net Profit Margin
Based on: 10-K (filing date: 2019-02-14), 10-K (filing date: 2018-02-15), 10-K (filing date: 2017-02-15), 10-K (filing date: 2016-02-16), 10-K (filing date: 2015-02-17).
2018 Calculations
1 Net profit margin = 100 × Profit (loss) attributable to common stockholders ÷ Sales of Machinery, Energy & Transportation
= 100 × ÷ =
2 Adjusted net profit margin = 100 × Adjusted profit (loss) attributable to common stockholders ÷ Sales of Machinery, Energy & Transportation
= 100 × ÷ =
| 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 2016 to 2017 and from 2017 to 2018. |
Adjusted Total Asset Turnover
Based on: 10-K (filing date: 2019-02-14), 10-K (filing date: 2018-02-15), 10-K (filing date: 2017-02-15), 10-K (filing date: 2016-02-16), 10-K (filing date: 2015-02-17).
2018 Calculations
1 Total asset turnover = Sales of Machinery, Energy & Transportation ÷ Total assets
= ÷ =
2 Adjusted total asset turnover = Sales of Machinery, Energy & Transportation ÷ Adjusted total assets
= ÷ =
| 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 2016 to 2017 and from 2017 to 2018. |
Adjusted Financial Leverage
Based on: 10-K (filing date: 2019-02-14), 10-K (filing date: 2018-02-15), 10-K (filing date: 2017-02-15), 10-K (filing date: 2016-02-16), 10-K (filing date: 2015-02-17).
2018 Calculations
1 Financial leverage = Total assets ÷ Equity attributable to common stockholders
= ÷ =
2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted equity attributable to common stockholders
= ÷ =
| 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 declined from 2016 to 2017 and from 2017 to 2018. |
Adjusted Return on Equity (ROE)
Based on: 10-K (filing date: 2019-02-14), 10-K (filing date: 2018-02-15), 10-K (filing date: 2017-02-15), 10-K (filing date: 2016-02-16), 10-K (filing date: 2015-02-17).
2018 Calculations
1 ROE = 100 × Profit (loss) attributable to common stockholders ÷ Equity attributable to common stockholders
= 100 × ÷ =
2 Adjusted ROE = 100 × Adjusted profit (loss) attributable to common stockholders ÷ Adjusted equity attributable to common stockholders
= 100 × ÷ =
| 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 2016 to 2017 and from 2017 to 2018. |
Adjusted Return on Assets (ROA)
Based on: 10-K (filing date: 2019-02-14), 10-K (filing date: 2018-02-15), 10-K (filing date: 2017-02-15), 10-K (filing date: 2016-02-16), 10-K (filing date: 2015-02-17).
2018 Calculations
1 ROA = 100 × Profit (loss) attributable to common stockholders ÷ Total assets
= 100 × ÷ =
2 Adjusted ROA = 100 × Adjusted profit (loss) attributable to common stockholders ÷ Adjusted total assets
= 100 × ÷ =
| 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 2016 to 2017 and from 2017 to 2018. |