Caterpillar Inc. (CAT) Earnings

Management highlights

- **Overall Q2 2026 Performance Highlights** * Achieved a company milestone with record Q2 sales and revenues of $20.5 billion, up 24% YoY, exceeding internal expectations. * Adjusted profit per share was $8.17, up 73% YoY; adjusted operating profit hit $4.5 billion with an adjusted operating margin of 21.9%, 430 basis points higher YoY. * Total backlog grew sequentially by $9 billion to a record $72 billion, up 92% YoY, with 59% of the backlog scheduled for delivery within the next 12 months. * Generated record Machinery, Energy & Transportation (MP&E) free cash flow of $5.1 billion, up $2.8 billion YoY, and deployed $2.2 billion to shareholders via dividends and share repurchases. * Recognized $392 million in IEPA tariff recoveries, with net post-recovery tariff costs of $400 million in the quarter, lower than the prior $700 million estimate from April due to favorable adjustments to prior tariff calculations. - **Segment Operational Highlights** * Power and Energy: Resumed production of the 10-megawatt medium-speed gas reciprocating engine platform, paused in 2022 due to low industry demand. The platform fills a product gap between high-speed reciprocating engines and industrial gas turbines, well-positioned for growing data center prime power demand. 1.5 gigawatts of capacity will be brought online with minimal incremental investment, with first shipments starting in Q4 2026. Power generation sales to users grew 72% YoY driven by data center demand, while oil and gas sales grew 6% YoY. * Construction Industries: Delivered first equipment units to Major Projects, a fully dealer-owned specialty rental joint venture for large-scale North American infrastructure, energy, manufacturing, and data center projects. The JV supplements local dealer rental fleets for large-scale projects that exceed individual dealer fleet capacity, expanding Caterpillar's addressable rental market. Sales to users grew 22% YoY, the sixth consecutive quarter of growth, driven by strong North American non-residential/residential construction and dealer rental fleet loading. * Resource Industries: Completed the acquisition of Skycatch in July 2025, following the prior acquisition of RPM Global, to enhance technology-enabled services for mining customers. Skycatch's high-precision spatial data and AI analytics help customers improve operational decision-making and efficiency. Sales to users grew 17% YoY, driven by demand across mining, heavy construction, and quarry and aggregates segments. - **Strategic Operational Efficiency Highlights** * Repurposed an existing 250,000 square foot former work tool facility in Wamego, Kansas for turbine production, converting the space in under 12 months at far lower cost than building a new factory. This accelerated the timeline for bringing 2.5x 2024 turbine capacity online to meet growing oil and gas and power generation demand.

Guidance

- Full-year 2026 sales and revenue growth guidance is raised from prior levels to mid-to-high teens YoY growth, driven by healthy broad-based demand across all three core segments, stronger backlog, and expected higher production throughput from capacity expansion projects in H2 2026. Services revenue growth is also expected to be higher than prior guidance. - Full-year 2026 adjusted operating profit margin is guided higher than the prior April outlook. Excluding the $400 million Q2 IEPA tariff recovery, full-year adjusted operating margin is expected to be near the bottom of the company's target range, as strategic growth investments and ongoing tariff costs offset leverage from higher sales volume. - Full-year 2026 MP&E free cash flow guidance is raised to the top half of the company's $6-$15 billion annual target range, with 2026 capital expenditure expected to remain at the prior forecast of ~$3.5 billion. - Full-year 2026 post-recovery tariff costs are expected to be ~$2.2 billion, at the low end of the prior guidance range, with no additional IEPA recoveries expected in H2 2026. Tariff impacts on H2 2026 margins are expected to be modest as the business laps prior incremental tariff costs. - Q3 2026 is expected to deliver strong YoY sales growth across all three core segments, driven by higher sales volume and favorable price realization. Tariff costs for Q3 are expected to be ~$600 million, in line with Q3 2025 levels. - End market specific guidance: Full-year power generation growth remains strong driven by AI-related data center build-outs; oil and gas is expected to deliver moderate YoY growth following a record 2025. North American construction demand remains positive, supported by IIJA infrastructure funding and ongoing rental fleet growth, with softness in residential construction leaving room for upside. Resource industries growth is driven by long-term demand for copper and gold, with elevated fleet age supporting moderate growth in rebuild activity.

Segment performance

1. **Power and Energy**: Q2 2026 sales were $8.2 billion, a 17% increase year-over-year (YoY), accounting for ~40% of total corporate sales. Segment profit increased 30% YoY to $2 billion, with a 24.6% profit margin (up 250 basis points YoY). Tariff costs impacted the segment margin by 90 basis points in the quarter. 2. **Construction Industries**: Q2 2026 sales were $8.3 billion, a 35% increase YoY, accounting for ~40.5% of total corporate sales. Segment profit increased 57% YoY to $1.9 billion, with a 23.3% profit margin (up 320 basis points YoY). Dealer inventory increased $400 million in the quarter, higher than prior expectations, and tariff costs impacted the segment margin by 340 basis points. 3. **Resource Industries**: Q2 2026 sales were $4.6 billion, a 20% increase YoY, accounting for ~22.4% of total corporate sales. Segment profit increased 23% YoY to $693 million, with a 14.9% profit margin (up 40 basis points YoY). Tariff costs impacted the segment margin by 260 basis points. 4. **Financial Products**: Q2 2026 revenues increased 10% YoY to $1.1 billion, driven by higher average earning assets across all regions. Segment profit increased 32% YoY to $328 million.

Risks & headwinds

- Ongoing geopolitical uncertainty creates fluid operating conditions and demand visibility challenges. - Tariff costs implemented since early 2025 continue to pressure segment margins across all three core business segments, even with lower-than-expected costs in Q2 2026. - Increasing strategic investment in R&D, capacity expansion, and technology (including autonomous mining) increases SG&A and manufacturing costs (including higher depreciation), partially offsetting operating leverage from higher sales volume. - Extended lead times for power generation products create scheduling tradeoffs between new long-term data center customers and long-standing oil and gas customers that require more near-term flexibility.

Analyst Q&A

• Q: The 10-megawatt reciprocating engine being brought back online—was its 1.5 gigawatts of annual capacity included in the 65 gigawatt 2030 total capacity target? Also, given concerns about slowing AI data center demand in the future, how confident are you in 65 gigawatt demand through 2030, and is demand broadening beyond data centers? /

  A: The 10-megawatt platform capacity was not included in the original 65 gigawatt target, but it is low volume and fills a product gap between our existing high-speed reciprocating engines and industrial turbines. We have not seen any customers pull back on AI-related data center demand, and are already taking orders for delivery into 2029 and 2030. Our capacity planning was never based solely on data center demand: it also supports growing oil and gas gas compression demand (where backlog has nearly doubled YoY) and growing aftermarket services for our large installed base of engines and turbines, so we remain confident in our long-term capacity outlook.

• Q: With construction industry (CI) volume stronger than expected in Q2 2026 and power and energy (P&E) volume slightly lower than expected, how do you expect volume growth trends for the two segments to shift over the next 2-4 quarters? /

  A: P&E volume is lower than expected solely due to production ramp speed, not weak demand—demand for P&E products remains very strong. CI saw a slow start in H1 2025 and accelerated through H2 2025 into H1 2026, so YoY comparisons will moderate in H2 2026 due to this lapped acceleration. We continue to increase production capacity for P&E, so P&E volume growth will pick up as we bring more capacity online.

• Q: How is Caterpillar approaching the extended lead times for gas reciprocating prime power, with orders already stretching into 2028 and 2029? Do you allocate capacity strategically, and how has customer sentiment around gas prime power evolved? /

  A: Lead times for gas turbines extend into late 2028 and 2029, with lead times for diesel standby also stretching well into 2028. We work closely with customers to schedule deliveries to maximize the number of customers we can serve, and intentionally protect capacity slots for our long-standing oil and gas customers, who typically have shorter planning horizons than large power generation projects. Demand for gas prime power continues to grow rapidly for data center and other applications, with no signs of slowing to date.

• Q: What is Caterpillar's long-term vision for the dealer rental business, including expected product mix and market share opportunity? /

  A: Growing the dealer rental business is a core pillar of our construction industry growth strategy. We expect dealer rental fleets to continue expanding, and to offer a full suite of equipment, including third-party Alliance products, to meet full customer project needs—this is required to compete with large national rental firms. The new Major Projects national JV fleet supplements local dealer fleets for large multi-year infrastructure projects, where individual dealers do not want to tie up capital in large one-off fleet investments. This positions us to gain market share in the large-scale rental market, which has historically been a smaller portion of our business.