How Caterpillar Makes Money? Understanding Caterpillar Business Model Core Elements

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This article is about “how Caterpillar makes money”. Firstly, we explain the key elements of Caterpillar business model. Then, we discuss revenue generating strategies and cost elements of Caterpillar. Then, we discuss key business segments of Caterpillar and how the company generates revenue from each of those segments. Then, we share Caterpillar revenues by business segments for the year 2014. Finally, we share the revenues, the profits, and the profit margins of Caterpillar for the year 2014.

Caterpillar is a leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. Caterpillar generates revenues from three major customer segments that include, Construction industries, resources industries and energy and power systems. Caterpillar business is highly dependent on its suppliers for raw materials including commodities like steel that are greatly impacted by macro changes in the environment.

Caterpillar Business Model

Caterpillar’s business model is highly dependent on developing and helping the dealer network succeed globally. The following diagram presents the key revenue and cost elements of Caterpillar business model.

How Caterpillar Makes Money

Caterpillar Revenue Generating Strategies From Products include:

  • Direct selling of turbines and locomotives to end users by account sales team
  • Direct selling of products to original equipment manufacturers in targeted segments
  • Marketing, exhibiting, promoting, and selling the products to its new and existing customers through company-owned and independent dealer networks-
  • Generating repeat business from existing customers by selling spare parts
  • Generating new business from price sensitive customers by selling remanufactured products

Caterpillar Revenue Generating Strategies From Services Include:

  • Enabling product rental services to monetize ideal assets
  • Providing financial assistance to dealer network for maintaining inventory
  • Providing financial assistance to end customers to buy the products on lease or credit
  • Providing loans to customers and dealers to use their Caterpillar equipment or other assets as collateral to obtain financing

Caterpillar Business Segments:

Caterpillar reports its revenues for the following business segments:

  • Construction Industries. This segment is focused on supporting customers using machinery in infrastructure and building construction applications. The product portfolio includes backhoe loaders, wheel loaders, track-type tractors, skid steer loaders, excavators, track-type loaders, and motor graders.
  • Resource Industries. This segment is focused on supporting customers using machinery in mining and quarrying applications. The product portfolio includes large track-type tractors, large mining trucks, underground mining equipment, rope shovels, draglines, hydraulic shovels, drills, wheel loaders, and articulated trucks.
  • Energy & Transportation. This segment is focused on supporting customers using reciprocating engines, turbines, diesel-electric locomotives and related parts across industries serving power generation, industrial, oil and gas and transportation applications, including marine and rail-related businesses.
  • Financial Products Segment. This segment provides financing to customers and dealers for the purchase and lease of Caterpillar and other equipment, as well as some financing for Caterpillar sales to dealers.  Financing plans include operating and finance leases, installment sale contracts, working capital loans and wholesale financing plans. The segment also provides various forms of insurance to customers and dealers to help support the purchase and lease of our equipment.
  • All other segments. All other segments include revenues from segments not reported in the aforementioned segments. It includes revenues from remanufacturing of Caterpillar engines and components and remanufacturing services for other companies. It also includes revenues from the following: Specialty products, hardened bar stock components, ground engaging tools, paving products, forestry products and industrial and waste products; on-highway vocational trucks for North America; parts distribution; distribution services responsible for dealer development and administration including a wholly-owned dealer in Japan.

Caterpillar’s Revenues by Business Segment FY’14

In FY’14 (fiscal year ending December 31, 2014), Caterpillar generated $55.2 billion of total revenues. Of these total revenues, Caterpillar generated

  • $13.9 billion revenues, 36% of the total, from the Construction industries segment
  • $8.9 billion revenues, 17% of the total, from the Resources industries segment
  • $21.7 billion revenues, 41% of the total, from the energy & Transportation industries segment
  • $3.3 billion revenues, 6% of the total, from the Financial products segment

Caterpillar Business Segments Revenues FY14

Caterpillar Profit Margins FY’14

Of the $55.2 billion of Caterpillar’s total revenues in FY’14, $39.8 billion were the cost of sales. This resulted in $15.4 billion of gross profit and a gross margin of 28%. Caterpillar operating costs were $10 billion. These include Selling, general and administrative expenses, Research and development expenses, Interest expense of Financial Products, Goodwill impairment charge, and other operating expenses.  This resulted in $5.3 billion of operating profit and an operating margin of 9.7%. After interest and other non-operating income and expenses and income taxes, Caterpillar had a net profit of $3.7 billion and a net margin of 6.7%.

Caterpillar Profits and Profit Margins FY14

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