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General Dynamics Corp. (GD)
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 Total Asset Turnover
- Adjusted Financial Leverage
- Adjusted Return on Equity (ROE)
- Adjusted Return on Assets (ROA)
Goodwill and Intangible Assets Accounting Policy
General Dynamics reviews long-lived assets, including intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. General Dynamics assesses the recoverability of the carrying value of assets held for use based on a review of undiscounted projected cash flows. Impairment losses, where identified, are measured as the excess of the carrying value of the long-lived asset over its estimated fair value as determined by discounted projected cash flows.
Concurrent with the acquisition of CSRA in April 2018, General Dynamics reorganized the Information Systems and Technology operating segment in accordance with the nature of the segment’s products and services into the Information Technology and Mission Systems segments. This reorganization similarly changed the composition of General Dynamics’ reporting units. Accordingly, goodwill of the Information Systems and Technology reporting unit was reassigned to the Information Technology and Mission Systems reporting units using a relative fair value allocation approach as of the date of the reorganization.
General Dynamics reviews goodwill for impairment annually or when circumstances indicate that the likelihood of an impairment is greater than 50%. Goodwill represents the purchase price paid in excess of the fair value of net tangible and intangible assets acquired in a business combination. The test for goodwill impairment is a two-step process to first identify potential goodwill impairment for each reporting unit by comparing the fair value of each of General Dynamics’ reporting units to its respective carrying value and then, if necessary, measure the amount of the impairment loss. General Dynamics estimates the fair value of the reporting units based primarily on the discounted projected cash flows of the underlying operations.
General Dynamics completed the required annual goodwill impairment test as of December 31, 2018. The results of the first-step test indicated that, for each of General Dynamics’ reporting units, no impairment existed. The estimated fair value of each of General Dynamics’ reporting units was substantially in excess of its respective carrying value as of December 31, 2018, with the exception of the Information Technology reporting unit.
The estimated fair value of the Information Technology reporting unit exceeded its carrying value as of December 31, 2018, by slightly more than 5%. This is due to the significant size of the CSRA acquisition relative to the newly formed Information Technology reporting unit and its recent acquisition date. Given that the net book value of this business was recorded at its fair value during the current reporting period, the reporting unit’s carrying value, by default, closely approximates its fair value at year end. As the carrying value and fair value of the Information Technology reporting unit are closely aligned, a material change in the fair value or carrying value would put the reporting unit at risk of goodwill impairment. For example, General Dynamics’ ability to realize synergies from the acquisition of CSRA and the level of funding in the U.S. government budget for contracts in the portfolio are key assumptions in the projections of revenue, earnings and cash flows. If General Dynamics’ actual experience in future years falls significantly below the current projections, the fair value of the reporting unit could be negatively impacted.Similarly, an increase in interest rates would lower General Dynamics’ discounted cash flows and negatively impact the fair value of the reporting unit. General Dynamics believes the projections and assumptions General Dynamics used in estimating fair value are reasonable, but it is possible they could change, impacting the fair value estimate, or the carrying value could change.
Source: 10-K (filing date: 2019-02-13).
Goodwill and Intangible Assets Disclosure
General Dynamics Corp., balance sheet: goodwill and intangible assets
US$ in millions
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| Intangible assets, gross carrying amount | |
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| Intangible assets, net carrying amount | |
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| Goodwill | |
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| Intangible assets and goodwill | |
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Based on: 10-K (filing date: 2019-02-13), 10-K (filing date: 2018-02-12), 10-K (filing date: 2017-02-06), 10-K (filing date: 2016-02-08), 10-K (filing date: 2015-02-09).
| Item | Description | The company |
|---|---|---|
| Intangible assets, net carrying amount | Sum of the carrying amounts of all intangible assets, excluding goodwill, as of the balance sheet date, net of accumulated amortization and impairment charges. | General Dynamics Corp.’s intangible assets, net carrying amount increased 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. | General Dynamics Corp.’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. | General Dynamics Corp.’s intangible assets and goodwill increased from 2016 to 2017 and from 2017 to 2018. |
Analyst Adjustments: Removal of Goodwill
General Dynamics Corp., adjustments to financial data
US$ in millions
Based on: 10-K (filing date: 2019-02-13), 10-K (filing date: 2018-02-12), 10-K (filing date: 2017-02-06), 10-K (filing date: 2016-02-08), 10-K (filing date: 2015-02-09).
General Dynamics Corp., Financial Data: Reported vs. Adjusted
Adjusted Ratios: Removal of Goodwill (Summary)
General Dynamics Corp., adjusted ratios
Based on: 10-K (filing date: 2019-02-13), 10-K (filing date: 2018-02-12), 10-K (filing date: 2017-02-06), 10-K (filing date: 2016-02-08), 10-K (filing date: 2015-02-09).
| Ratio | Description | The company |
|---|---|---|
| Adjusted total asset turnover | An activity ratio calculated as total revenue divided by adjusted total assets. | General Dynamics Corp.’s adjusted total asset turnover deteriorated from 2016 to 2017 but then improved from 2017 to 2018 not reaching 2016 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. |
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| Adjusted ROE | A profitability ratio calculated as net income divided by adjusted shareholders’ equity. | |
| Adjusted ROA | A profitability ratio calculated as net income divided by adjusted total assets. | General Dynamics Corp.’s adjusted ROA deteriorated from 2016 to 2017 but then slightly improved from 2017 to 2018. |
General Dynamics Corp., Ratios: Reported vs. Adjusted
Adjusted Total Asset Turnover
Based on: 10-K (filing date: 2019-02-13), 10-K (filing date: 2018-02-12), 10-K (filing date: 2017-02-06), 10-K (filing date: 2016-02-08), 10-K (filing date: 2015-02-09).
2018 Calculations
1 Total asset turnover = Revenue ÷ Total assets
= ÷ =
2 Adjusted total asset turnover = Revenue ÷ Adjusted total assets
= ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted total asset turnover | An activity ratio calculated as total revenue divided by adjusted total assets. | General Dynamics Corp.’s adjusted total asset turnover deteriorated from 2016 to 2017 but then improved from 2017 to 2018 not reaching 2016 level. |
Adjusted Financial Leverage
Based on: 10-K (filing date: 2019-02-13), 10-K (filing date: 2018-02-12), 10-K (filing date: 2017-02-06), 10-K (filing date: 2016-02-08), 10-K (filing date: 2015-02-09).
2018 Calculations
1 Financial leverage = Total assets ÷ Shareholders’ equity
= ÷ =
2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted shareholders’ equity
= ÷ =
| 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. |
Adjusted Return on Equity (ROE)
Based on: 10-K (filing date: 2019-02-13), 10-K (filing date: 2018-02-12), 10-K (filing date: 2017-02-06), 10-K (filing date: 2016-02-08), 10-K (filing date: 2015-02-09).
2018 Calculations
1 ROE = 100 × Net earnings ÷ Shareholders’ equity
= 100 × ÷ =
2 Adjusted ROE = 100 × Net earnings ÷ Adjusted shareholders’ equity
= 100 × ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted ROE | A profitability ratio calculated as net income divided by adjusted shareholders’ equity. |
Adjusted Return on Assets (ROA)
Based on: 10-K (filing date: 2019-02-13), 10-K (filing date: 2018-02-12), 10-K (filing date: 2017-02-06), 10-K (filing date: 2016-02-08), 10-K (filing date: 2015-02-09).
2018 Calculations
1 ROA = 100 × Net earnings ÷ Total assets
= 100 × ÷ =
2 Adjusted ROA = 100 × Net earnings ÷ Adjusted total assets
= 100 × ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted ROA | A profitability ratio calculated as net income divided by adjusted total assets. | General Dynamics Corp.’s adjusted ROA deteriorated from 2016 to 2017 but then slightly improved from 2017 to 2018. |