Caterpillar Earnings Call: Record Backlog, Tariff Headwinds

Caterpillar ((CAT)) has held its Q4 earnings call. Read on for the main highlights of the call.

Caterpillar’s Earnings Call Balances Record Results With Tariff and Margin Strain

Caterpillar’s latest earnings call painted a picture of a company firing on most operational cylinders while navigating mounting cost headwinds. Management highlighted record sales, a historic backlog, strong free cash flow and robust demand in power and energy, services, and financial operations. At the same time, sharply higher tariffs, margin compression in key segments, and capacity and cost pressures emerged as meaningful constraints. Overall sentiment leaned positive thanks to strong execution and cash generation, but sustained performance will hinge on managing tariffs and scaling capacity without sacrificing returns.

Record Revenue Marks a New High-Water Mark

Caterpillar reported the highest annual sales and revenues in its history, delivering $67.6 billion for the full year, up 4% from the prior year. The fourth quarter was particularly strong, with sales and revenues climbing 18% to $19.1 billion, a single‑quarter record. These figures underscore resilient end‑market demand despite macro uncertainties and cost pressures, reinforcing Caterpillar’s ability to convert its large installed base and project pipeline into top‑line growth.

Cash Generation Fuels Aggressive Shareholder Returns

The company’s cash engine remains a core pillar of the story. Machinery, Energy & Transportation (MP&E) free cash flow reached $9.5 billion for 2025, marking the third straight year above $9 billion, with $3.7 billion generated in the most recent quarter alone. Caterpillar returned $7.9 billion to shareholders in 2025, including $5.2 billion in share repurchases and $2.7 billion in dividends, and signaled plans for an even larger accelerated share repurchase. This combination of high free cash flow conversion and sizable capital return continues to be a key attraction for investors.

Record Backlog Provides Multi‑Year Visibility

Caterpillar’s backlog surged to a record $51 billion, up $21 billion year‑over‑year, a 71% increase that highlights powerful ordering momentum across its business. Roughly 62% of that backlog is expected to be delivered over the next 12 months, while some orders extend into 2027 and beyond, effectively giving the company multi‑year revenue visibility. This unprecedented order book underpins management’s confidence in continued growth, though it also introduces execution and timing risk as projects stretch over longer horizons.

Power & Energy Emerges as a Standout Growth Engine

Power & Energy was the clear outperformer in the quarter. Sales to users in this segment rose 37% in Q4, with power generation specifically up 44%. Overall segment sales climbed 23% to $9.4 billion, while segment profit increased 25% to $1.8 billion, pushing margins to 19.6%, 30 basis points higher than the prior year despite cost headwinds. Full‑year power generation sales exceeded $10 billion, growing more than 30% year‑over‑year. This reflects strong demand from data centers, energy infrastructure, and other mission‑critical applications, positioning Power & Energy as Caterpillar’s fastest-growing engine for the near term.

Services and Digital Initiatives Deepen Recurring Revenue

Caterpillar continued to make progress on its long‑term services strategy, with full‑year services revenues reaching $24 billion. The installed fleet expanded to more than 1.6 million assets, and the company is leveraging condition monitoring, e‑commerce, and tech‑enabled machines to deepen customer engagement and capture more lifecycle value. These digital and service initiatives are central to Caterpillar’s ambition to grow services revenue to $30 billion by 2030, shifting the business mix toward more stable, higher‑margin recurring revenue streams.

Autonomy and Commercial Wins Highlight Strategic Edge

The company is also advancing autonomy and high‑profile commercial wins. Its autonomous haul truck fleet grew to 827 units, up from 690 at the end of 2024, a roughly 20% increase. Caterpillar cited new deployments such as a mixed fleet agreement with Vale for more than 90 trucks, as well as major prime power orders for data centers, including a roughly 2 GW order for the Monarch Compute Campus. These wins demonstrate Caterpillar’s competitive position at the intersection of heavy equipment, autonomy, and critical infrastructure power, reinforcing future growth opportunities in both mining automation and data center support.

Financial Services Adds Stability With Strong Credit Quality

Caterpillar’s Financial Products segment contributed steady growth and improved profitability. Revenues rose 7% to about $1.1 billion, while segment profit jumped 58% to $262 million. Credit quality remained robust, with past dues at 1.37%, down 19 basis points, and the allowance rate at a record‑low 0.86%. Retail new business volume grew 10%. This combination of growth, high‑quality credit, and rising profitability provides a stabilizing counterweight to the more cyclical equipment segments.

Tariff Shock Creates a Major Profitability Headwind

Despite strong demand, tariffs have become a central drag on profitability. In 2025, new tariffs had an absolute value of about $1.8 billion, with a net incremental impact of roughly $1.7 billion after mitigation efforts. Looking ahead, Caterpillar expects incremental tariff costs to climb to around $2.6 billion in 2026, about $800 million higher than 2025, with approximately $800 million of that hitting in the first quarter alone. These increases represent a material headwind to operating margins and earnings, and management emphasized ongoing mitigation efforts but acknowledged the significant pressure they create.

Margins Under Pressure Despite Within‑Range Performance

At the enterprise level, Caterpillar’s margins showed strain. The fourth‑quarter adjusted operating profit margin came in at 15.6%, roughly 270 basis points lower than a year earlier. For the full year, the adjusted operating margin was about 17.2%, which sits within management’s target range but reflects the impact of tariffs and higher strategic spending. Management indicated that margins are likely to be near the bottom of the target range when tariffs are fully included, suggesting that without these external costs, underlying operational performance remains stronger than the headline numbers imply.

Construction Industries Hit by Tariffs and Incentive Costs

Construction Industries delivered solid top‑line growth but weaker profitability. Q4 sales rose 15% to $6.9 billion, reflecting continued demand in key construction markets. However, segment profit fell 12% to $1.0 billion, and margins dropped 470 basis points to 14.9%. The company attributed roughly 600 basis points of pressure to tariffs, along with higher incentive compensation and slightly unfavorable price realization. This dynamic underscores how external cost shocks and compensation alignment with performance can erode margins even when sales are strong.

Resource Industries Softens Amid Mining Discipline

Resource Industries showed more pronounced weakness as mining customers maintained capital discipline, particularly against a backdrop of lower coal prices. Q4 sales to users declined 7% year‑over‑year, and segment profit dropped 24% to $360 million. Segment margins compressed by 510 basis points, with tariffs accounting for about 490 basis points of that decline. While longer‑term mining fundamentals may remain intact, near‑term caution from customers is weighing on demand and segment profitability.

Rising Costs and Investments Weigh on Near‑Term Earnings

Beyond tariffs, Caterpillar’s profitability is also being pressured by higher manufacturing costs, increased incentive compensation, and elevated strategic investments in R&D and SG&A. The company plans approximately $3.5 billion in capital expenditures for 2026, about $800 million higher than the prior year, which will trim MP&E free cash flow slightly versus 2025. Management also expects restructuring charges of roughly $300–$350 million in 2026. These spending decisions reflect a deliberate choice to fund capacity, technology, and structural improvements even at the cost of some near‑term margin and cash flow dilution.

Capacity and Timing Constraints Temper Upside

While demand is particularly strong in Power & Energy, Caterpillar made clear that growth will be paced by the timing of capacity expansions and supply‑chain readiness. Some of the record backlog will be fulfilled over several years, and the company’s ability to ramp production without introducing inefficiencies or bottlenecks will be critical. These capacity and timing constraints limit immediate upside and introduce execution and pricing risk as the company works through long‑dated orders in a potentially changing cost environment.

Regional and Mix Headwinds Add Another Layer of Complexity

The company is also dealing with softer regions and an evolving mix. In Construction Industries, sales to users slipped in EAME and Asia‑Pacific during the fourth quarter, and activity in China remains subdued, with management only expecting a gradual recovery. Price realization in Q4 was roughly flat overall, and Caterpillar anticipates only a modest 2% tailwind from pricing across 2026. With costs still rising, this limited pricing power heightens sensitivity to further input cost inflation and makes margin management more challenging.

Guidance: Growth at the Top End, Margins Capped by Tariffs

Looking ahead to 2026, Caterpillar guided to enterprise sales growth near the top end of its 5–7% long‑term CAGR target, with all three primary segments expected to grow and Power & Energy leading the way. The company expects about 62% of its record $51 billion backlog to convert into revenue over the next 12 months, supported by roughly 2% of total sales from positive price realization. Full‑year adjusted operating margins are projected to exceed 2025’s ~17% but remain near the bottom of the target range, largely due to incremental tariffs of about $2.6 billion in 2026, including roughly $800 million in Q1 spread across Construction, Resource, and Power & Energy. Management anticipates capital expenditures of around $3.5 billion, MP&E free cash flow slightly below the 2025 level of $9.5 billion, a roughly 23% effective tax rate, restructuring costs of $300–350 million, and a normal first‑quarter dealer inventory build in excess of $1 billion that should support near‑term sales.

Caterpillar’s earnings call ultimately showcased a company with powerful demand drivers, a record backlog, and a robust cash profile, offset by intensifying tariff and cost pressures that cap margin expansion. For investors, the key takeaway is a fundamentally strong growth and cash generation story, particularly in Power & Energy, services, and autonomy, tempered by external cost shocks and execution risk around capacity and backlog conversion. How effectively Caterpillar mitigates tariffs and scales to meet record demand will be central to whether the current cycle of record revenue translates into sustained earnings and shareholder value growth.