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Microsoft Excel LibreOffice Calc


Analysis of Goodwill and Intangible Assets

Difficulty: Advanced


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 monitor 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 determine 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: Caterpillar Inc., Annual Report


Goodwill and Intangible Assets Disclosure

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

USD $ in millions

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Customer relationships hidden hidden hidden hidden hidden
Intellectual property hidden hidden hidden hidden hidden
Other hidden hidden hidden hidden hidden
Finite-lived intangible assets, gross carrying amount hidden hidden hidden hidden hidden
Accumulated amortization hidden hidden hidden hidden hidden
Finite-lived intangible assets, net hidden hidden hidden hidden hidden
In-process research & development hidden hidden hidden hidden hidden
Indefinite-lived intangible assets hidden hidden hidden hidden hidden
Intangible assets hidden hidden hidden hidden hidden
Goodwill hidden hidden hidden hidden hidden
Intangible assets and goodwill hidden hidden hidden hidden hidden

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 declined from 2015 to 2016 and from 2016 to 2017.
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 declined from 2015 to 2016 but then slightly increased from 2016 to 2017.
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 2015 to 2016 and from 2016 to 2017.

Analyst Adjustments: Removal of Goodwill

Caterpillar Inc., adjustments to financial data

USD $ in millions

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Adjustment to Total Assets
Total assets (as reported) hidden hidden hidden hidden hidden
Less: Goodwill hidden hidden hidden hidden hidden
Total assets (adjusted) hidden hidden hidden hidden hidden
Adjustment to Equity Attributable To Common Stockholders
Equity attributable to common stockholders (as reported) hidden hidden hidden hidden hidden
Less: Goodwill hidden hidden hidden hidden hidden
Equity attributable to common stockholders (adjusted) hidden hidden hidden hidden hidden
Adjustment to Profit (loss) Attributable To Common Stockholders
Profit (loss) attributable to common stockholders (as reported) hidden hidden hidden hidden hidden
Add: Goodwill impairment charge hidden hidden hidden hidden hidden
Profit (loss) attributable to common stockholders (adjusted) hidden hidden hidden hidden hidden

Adjusted Ratios: Removal of Goodwill (Summary)

Caterpillar Inc., adjusted ratios

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Net Profit Margin
Reported net profit margin hidden% hidden% hidden% hidden% hidden%
Adjusted net profit margin hidden% hidden% hidden% hidden% hidden%
Total Asset Turnover
Reported total asset turnover hidden hidden hidden hidden hidden
Adjusted total asset turnover hidden hidden hidden hidden hidden
Financial Leverage
Reported financial leverage hidden hidden hidden hidden hidden
Adjusted financial leverage hidden hidden hidden hidden hidden
Return on Equity (ROE)
Reported ROE hidden% hidden% hidden% hidden% hidden%
Adjusted ROE hidden% hidden% hidden% hidden% hidden%
Return on Assets (ROA)
Reported ROA hidden% hidden% hidden% hidden% hidden%
Adjusted ROA hidden% hidden% hidden% hidden% hidden%
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 deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017.
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Caterpillar Inc.'s adjusted total asset turnover deteriorated from 2015 to 2016 but then improved from 2016 to 2017 not reaching 2015 level.
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 2015 to 2016 but then slightly declined from 2016 to 2017.
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity. Caterpillar Inc.'s adjusted ROE deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017.
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Caterpillar Inc.'s adjusted ROA deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017.

Adjusted Net Profit Margin

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Profit (loss) attributable to common stockholders (USD $ in millions) hidden hidden hidden hidden hidden
Sales of Machinery, Energy & Transportation (USD $ in millions) hidden hidden hidden hidden hidden
Net profit margin1 hidden% hidden% hidden% hidden% hidden%
Adjusted for Goodwill
Adjusted profit (loss) attributable to common stockholders (USD $ in millions) hidden hidden hidden hidden hidden
Sales of Machinery, Energy & Transportation (USD $ in millions) hidden hidden hidden hidden hidden
Adjusted net profit margin2 hidden% hidden% hidden% hidden% hidden%

2017 Calculations

1 Net profit margin = 100 × Profit (loss) attributable to common stockholders ÷ Sales of Machinery, Energy & Transportation
= 100 × hidden ÷ hidden = hidden%

2 Adjusted net profit margin = 100 × Adjusted profit (loss) attributable to common stockholders ÷ Sales of Machinery, Energy & Transportation
= 100 × hidden ÷ hidden = hidden%

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 deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017.

Adjusted Total Asset Turnover

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Sales of Machinery, Energy & Transportation (USD $ in millions) hidden hidden hidden hidden hidden
Total assets (USD $ in millions) hidden hidden hidden hidden hidden
Total asset turnover1 hidden hidden hidden hidden hidden
Adjusted for Goodwill
Sales of Machinery, Energy & Transportation (USD $ in millions) hidden hidden hidden hidden hidden
Adjusted total assets (USD $ in millions) hidden hidden hidden hidden hidden
Adjusted total asset turnover2 hidden hidden hidden hidden hidden

2017 Calculations

1 Total asset turnover = Sales of Machinery, Energy & Transportation ÷ Total assets
= hidden ÷ hidden = hidden

2 Adjusted total asset turnover = Sales of Machinery, Energy & Transportation ÷ Adjusted total assets
= hidden ÷ hidden = hidden

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 deteriorated from 2015 to 2016 but then improved from 2016 to 2017 not reaching 2015 level.

Adjusted Financial Leverage

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Total assets (USD $ in millions) hidden hidden hidden hidden hidden
Equity attributable to common stockholders (USD $ in millions) hidden hidden hidden hidden hidden
Financial leverage1 hidden hidden hidden hidden hidden
Adjusted for Goodwill
Adjusted total assets (USD $ in millions) hidden hidden hidden hidden hidden
Adjusted equity attributable to common stockholders (USD $ in millions) hidden hidden hidden hidden hidden
Adjusted financial leverage2 hidden hidden hidden hidden hidden

2017 Calculations

1 Financial leverage = Total assets ÷ Equity attributable to common stockholders
= hidden ÷ hidden = hidden

2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted equity attributable to common stockholders
= hidden ÷ hidden = hidden

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 2015 to 2016 but then slightly declined from 2016 to 2017.

Adjusted Return on Equity (ROE)

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Profit (loss) attributable to common stockholders (USD $ in millions) hidden hidden hidden hidden hidden
Equity attributable to common stockholders (USD $ in millions) hidden hidden hidden hidden hidden
ROE1 hidden% hidden% hidden% hidden% hidden%
Adjusted for Goodwill
Adjusted profit (loss) attributable to common stockholders (USD $ in millions) hidden hidden hidden hidden hidden
Adjusted equity attributable to common stockholders (USD $ in millions) hidden hidden hidden hidden hidden
Adjusted ROE2 hidden% hidden% hidden% hidden% hidden%

2017 Calculations

1 ROE = 100 × Profit (loss) attributable to common stockholders ÷ Equity attributable to common stockholders
= 100 × hidden ÷ hidden = hidden%

2 Adjusted ROE = 100 × Adjusted profit (loss) attributable to common stockholders ÷ Adjusted equity attributable to common stockholders
= 100 × hidden ÷ hidden = hidden%

Ratio Description The company
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity. Caterpillar Inc.'s adjusted ROE deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017.

Adjusted Return on Assets (ROA)

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Profit (loss) attributable to common stockholders (USD $ in millions) hidden hidden hidden hidden hidden
Total assets (USD $ in millions) hidden hidden hidden hidden hidden
ROA1 hidden% hidden% hidden% hidden% hidden%
Adjusted for Goodwill
Adjusted profit (loss) attributable to common stockholders (USD $ in millions) hidden hidden hidden hidden hidden
Adjusted total assets (USD $ in millions) hidden hidden hidden hidden hidden
Adjusted ROA2 hidden% hidden% hidden% hidden% hidden%

2017 Calculations

1 ROA = 100 × Profit (loss) attributable to common stockholders ÷ Total assets
= 100 × hidden ÷ hidden = hidden%

2 Adjusted ROA = 100 × Adjusted profit (loss) attributable to common stockholders ÷ Adjusted total assets
= 100 × hidden ÷ hidden = hidden%

Ratio Description The company
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Caterpillar Inc.'s adjusted ROA deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017.