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    CAT
    Earnings call· Jun 2025(Q2 FY25)

    CATERPILLAR Q2 FY25 earnings call CAT

    Aug 5, 2025 Source

    Executive summary

    Caterpillar Q2 FY25 — Record Backlog and Strong Operational Performance Despite Tariff Headwinds

    Caterpillar delivered solid Q2 FY25 results, with adjusted operating profit and margin exceeding expectations, driven by strong operational performance. The company achieved a record backlog of $37.5 billion, fueled by robust order activity across all segments, particularly in power generation for data centers. While the outlook for the top line has improved, significant tariff headwinds are expected to impact profitability in the second half of the year, pushing full-year adjusted operating profit margin to the lower end of the target range.

    Highlights

    5

    • Backlog grew by $2.5 billion sequentially to a record $37.5 billion, with increases across all three primary segments.

    • Adjusted operating profit margin of 17.6% exceeded expectations due to lower-than-expected manufacturing costs.

    • Energy & Transportation sales to users increased 9%, driven by a 19% growth in power generation, primarily from data center demand.

    • ME&T free cash flow was approximately $2.4 billion in Q2 FY25.

    • Deployed $1.5 billion to shareholders through $800 million in share repurchases and a 7% dividend increase.

    Concerns

    5

    • Sales and revenues decreased 1% year-over-year, primarily due to unfavorable price realization.

    • Adjusted operating profit decreased 22% year-over-year, mainly due to unfavorable manufacturing costs, including tariffs, and unfavorable price.

    • Net impact of incremental tariffs was around the top end of the estimated $250 million to $350 million range for Q2 FY25.

    • Full-year 2025 adjusted operating profit margin is expected to be in the bottom half of the target range due to tariffs.

    • Services revenues expected to be about flat versus 2024, slightly lower than previous expectations due to reduced machine rebuild activity.

    Guidance & targets

    19
    CategoryTargetConfidence
    Full-year 2025 Sales and Revenues
    increase slightly versus 2024
    high materiality
    High
    Full-year 2025 Services Revenues
    about flat versus 2024
    medium materiality
    Medium
    Full-year 2025 Adjusted Operating Profit Margin (excluding tariffs)
    in the top half of our target margin range
    high materiality
    High
    Full-year 2025 Adjusted Operating Profit Margin (including tariffs)
    in the bottom half of the target margin range
    high materiality
    High
    Full-year 2025 ME&T Free Cash Flow
    around the middle of the $5 billion to $10 billion target range
    high materiality
    High
    Full-year 2025 Restructuring Costs
    $300 million to $350 million
    medium materiality
    High
    Full-year 2025 Effective Global Tax Rate
    23.0%
    low materiality
    High
    Third Quarter 2025 Sales
    grow moderately versus the prior year
    high materiality
    High
    Third Quarter 2025 Adjusted Operating Profit Margin (excluding tariffs)
    similar to the prior year
    high materiality
    High
    Third Quarter 2025 Adjusted Operating Profit Margin (including tariffs)
    lower versus the prior year
    high materiality
    High
    Full-year 2025 Capital Expenditures
    around $2.5 billion
    medium materiality
    High
    Full-year 2025 Dealer Inventory
    about flat for the full year
    medium materiality
    High
    Full-year 2025 Construction Industries Sales to Users
    growth
    medium materiality
    High
    Full-year 2025 Dealer Rental Revenues
    grow
    low materiality
    High
    Full-year 2025 China above 10-ton excavator industry
    full year growth
    low materiality
    Medium
    Full-year 2025 Resource Industries Sales to Users
    lower compared to last year
    medium materiality
    High
    Full-year 2025 Power Generation Sales
    growth
    high materiality
    High
    Full-year 2025 Oil and Gas Sales
    moderate growth
    medium materiality
    Medium
    Full-year 2025 Transportation Sales
    remain stable
    low materiality
    High

    Segment performance

    4
    SegmentRevenueYoYQoQMargin
    Construction Industries
    Sales decreased primarily due to unfavorable price realization. Profit and margin declined due to unfavorable price realization and a 170 bps impact from incremental tariffs. Sales to users grew, particularly in North America, better than anticipated.
    Profit: $1.2 billionProfit YoY change: -29%Margin YoY change: -600 bpsSales to users YoY: +2%North America sales to users YoY: +3%EAME sales YoY: +13%Asia Pacific sales YoY: +6%Latin America sales YoY: -20%
    		$6.2 billion-7%—20.1%
    Resource Industries
    Sales decreased primarily due to unfavorable price realization. Profit and margin declined due to unfavorable price realization, lower sales volume (including unfavorable product mix), and a 230 bps impact from incremental tariffs. Sales to users declined, but heavy construction and quarry/aggregates were slightly better than expected.
    Profit: $537 millionProfit YoY change: -25%Margin YoY change: -500 bpsSales to users YoY: -3%
    		$3.1 billion-4%—17.4%
    Energy & Transportation
    Sales increased due to higher sales volume and favorable price realization. Profit increased, but margin slightly decreased due to unfavorable manufacturing costs, largely from tariffs (110 bps impact). Power generation sales saw significant growth, driven by data center demand.
    Profit: $1.6 billionProfit YoY change: +4%Margin YoY change: -60 bpsSales to users YoY: +9%Power generation sales YoY: +28%Oil and gas sales YoY: +2%Industrial sales YoY: +1%Transportation sales YoY: -7%
    		$7.8 billion+7%—20.2%
    Financial Products
    Revenues increased due to higher average earning assets in North America. Profit increased due to equity securities and higher earning assets, partially offset by higher provisions for credit losses. Past dues were at a 25-year Q2 low, and retail new business volume was at a 10-year Q2 high.
    Segment profit: $248 millionSegment profit YoY change: +9%Past dues: 1.62%Past dues YoY change: -12 bpsAllowance rate: 0.94%Retail credit applications growth YoY: +5%Retail new business volume growth YoY: +5%
    		$1.0 billion+4%——

    Operational metrics

    21
    Adjusted Operating Profit
    $2.9 billion-22% YoY
    Q2 FY25

    Mainly due to unfavorable manufacturing costs (tariffs) and unfavorable price. Exceeded expectations due to favorable manufacturing costs from cost absorption.

    Adjusted Operating Profit Margin
    17.6%-480 bps YoY
    Q2 FY25

    Exceeded expectations primarily due to favorable manufacturing costs driven by cost absorption.

    Adjusted Profit Per Share
    $4.72vs $5.99 last year
    Q2 FY25

    Excluded restructuring costs of $0.10. Favorable impact of $0.17 from share repurchases.

    Share Repurchase Spend
    $800 million
    Q2 FY25

    Part of $1.5 billion deployed to shareholders.

    Dividend Increase
    7%
    Q2 FY25

    Fifth consecutive year with a high single-digit quarterly increase.

    ME&T Net Debt
    $5.2 billion
    Q2 FY25

    Issued bonds totaling $2 billion at attractive financing rates during the quarter.

    Enterprise Cash Balance
    $5.4 billion
    Q2 FY25

    Held $1.2 billion in slightly longer-dated liquid marketable securities to improve yields.

    Other Income and Expense
    unfavorable by $71 millionvs prior year
    Q2 FY25

    Primarily driven by an unfavorable foreign currency impact of $122 million from ME&T balance sheet translation, compared to a favorable impact of $20 million last year.

    Deferred Compensation Expense Impact on Operating Profit
    —
    Q2 FY25

    Negatively impacted operating profit due to strength in equity markets; offset by total return swaps reported in other income and expense.

    Machine Sales to Users
    about flatvs Q2 FY24
    Q2 FY25

    Overall company-wide.

    North America Construction Sales to Users
    +3%YoY
    Q2 FY25

    Better than anticipated due to growth in residential and non-residential construction, partially offset by lower rental fleet loading.

    EAME Construction Sales to Users
    increased
    Q2 FY25

    Primarily due to growth in Africa and the Middle East, but overall below expectations due to weakness in Europe.

    Asia Pacific Construction Sales to Users
    declined slightly
    Q2 FY25

    China was about flat, but Q2 was below expectations due to lower activity after a stronger-than-expected Q1.

    Latin America Construction Sales to Users
    declined
    Q2 FY25

    Slightly better than anticipated.

    Dealer Rental Revenue Growth
    continued to grow
    Q2 FY25

    Despite lower rental fleet loading.

    Coal Revenues as % of Total Revenue
    low single digits
    current

    Diminishing over time.

    Used Equipment Inventory Levels
    remain low
    Q2 FY25

    Conversion rates remain above historical averages as customers choose to buy equipment at the end of their lease term.

    Unfavorable Price Realization
    —
    Q2 FY25

    Primary driver for sales decrease. More unfavorable than anticipated in CI due to merchandising programs.

    Tariff Net Impact (Full Year 2025)
    $1.3 billion to $1.5 billion
    FY25

    Net of some mitigating actions and cost controls. Assumes higher net incremental tariff impacts in Q3 and Q4 compared to Q2. Likely larger in Q4 than Q3.

    Tariff Net Cost Headwind (Q3 2025)
    $400 million to $500 million
    Q3 FY25

    Larger than Q2 impact, which reflected only a partial quarter.

    Price Realization Headwind (Q3 2025 CI)
    roughly half the sizevs Q2 FY25
    Q3 FY25

    Expected to diminish further in Q4. Merchandising programs started to kick in during Q3 FY24, easing year-over-year comparison.

    Industry KPIs

    7
    MetricValueDetails
    Capacity expansionincreased
    Tariff cost impactaround top end of $250 million to $350 million rangeUSD
    Parts aftermarket businessabout flat%
    Data center prime power demand+19%%
    Dealer inventory months of supplyup $100 millionUSD
    Order backlog order intake by segment$37.5 billionUSD
    Industry production market size forecastsfull year growth

    Orderbook & backlog

    1
    Total Backlog$37.5 billionQ2 FY25 end

    up $2.5 billion sequentially

    Record level, with increases across all three primary segments.

    Risks & headwinds

    5
    Incremental TariffsQ2 FY25, Q3 FY25, Q4 FY25, FY25

    Q2 FY25 impact around top end of $250M-$350M range; FY25 expected $1.3B-$1.5B; Q3 FY25 expected $400M-$500M net cost headwind.

    Mitigation: Initial mitigating actions (cost controls, dual sourcing, USMCA compliance) implemented; evaluating long-term actions (sourcing changes, pricing) once there is sufficient certainty in trade negotiations.

    Lower Machine Rebuild ActivityFY25

    Services revenues expected about flat for FY25, slightly lower than previous expectations.

    Mitigation: Not explicitly stated, but implies a focus on other revenue streams or efficiency.

    Weakness in Europe (Construction Industries)Q2 FY25

    Overall growth in EAME below expectations in Q2 FY25.

    Mitigation: Not explicitly stated, but full-year EAME sales to users expected moderate growth driven by Africa/Middle East and improving European conditions.

    Declining Coal PricesH2 FY25

    Caused an increase in parked trucks, leading to slightly lower rebuild activity in Resource Industries.

    Mitigation: Not explicitly stated, but company focuses on overall commodity demand and long-term profitable growth opportunities.

    Softness in Well Servicing (Oil and Gas)FY25

    Expected to continue due to ongoing capital discipline, industry consolidation, and efficiency improvements.

    Mitigation: Focus on positive momentum in gas compression applications and strong Solar Turbines backlog.

    What to watch in Q3 FY25

    5

    Full-year 2025 Adjusted Operating Profit Margin

    next quarter
    CurrentBottom half of target range (including tariffs)
    TargetAny revision to the range or further quantification of tariff impact

    Why it matters

    Tariffs are a significant headwind, and any change in their impact or mitigation strategies will directly affect profitability.

    Including the net impact from incremental tariffs we expect full year adjusted operating profit margin to be in the bottom half of the target margin range.

    Q&A highlights

    6

    How does Caterpillar plan to mitigate tariff headwinds in the medium to long term? Will it involve changing sourcing, pricing, or will some impact be structural?

    Management stated that all options are on the table for tariff mitigation, including sourcing changes and pricing adjustments, but they need more certainty on the fluid trade environment before committing to long-term actions. They are currently taking 'no regrets' actions like cost controls and dual sourcing where beneficial, and working on USMCA compliance. They are not considering the impact permanent at this stage.

    “Some of those actions, and you kind of mentioned all of them. I think all of them are on the table. Obviously, some of the actions are quicker for us to implement and quicker for us to see results versus moving a footprint requires some investment and can take a significant amount of time.”

    asked by Tami Zakaria · answered by Joseph Creed

    2 min read6 chapters

    Detailed Narrative

    01

    Strong Backlog and Operational Performance

    Caterpillar reported a solid operational quarter, with adjusted operating profit and margin exceeding expectations due to lower manufacturing costs. The company's backlog grew by $2.5 billion sequentially to a record $37.5 billion, driven by strong order rates across all three primary segments. This robust backlog provides significant momentum heading into the second half of 2025 and into 2026.

    02

    Impact of Incremental Tariffs

    The net impact of incremental tariffs was at the high end of the estimated $250 million to $350 million range for Q2 FY25. For the full year, tariffs are expected to be a $1.3 billion to $1.5 billion headwind, net of initial mitigating actions, pushing the full-year adjusted operating profit margin into the bottom half of the target range. Management is evaluating long-term mitigation strategies but awaits more certainty in trade negotiations.

    03

    Construction Industries Outlook

    Construction Industries saw sales to users grow 2% year-over-year, with North America up 3% due to residential and non-residential construction. Full-year sales to users growth is now anticipated, an improvement from the January outlook. Dealer rental revenues are also expected to grow, with fleet loading increasing in the second half, offsetting earlier declines.

    04

    Resource Industries and Energy & Transportation Dynamics

    Resource Industries sales to users declined 3%, but strong order rates and backlog growth, particularly for large mining and articulated trucks, indicate positive momentum. Energy & Transportation sales to users increased 9%, with power generation up 19% driven by data center demand. The segment's large engine capacity expansion is progressing, with significant capacity expected online by late 2026/early 2027.

    05

    Dealer Inventory and Merchandising Programs

    Dealer inventory increased by $100 million sequentially, with machine dealer inventory down $400 million. Machine dealer inventories are expected to be flat for the full year, implying a net build in the second half. Attractive merchandising programs, particularly low-interest financing through Cat Financial, are stimulating higher sales to users and contributing to positive volume, despite some unfavorable price realization.

    06

    Capital Deployment and Financial Health

    Caterpillar deployed $1.5 billion to shareholders in Q2 FY25, including $800 million in share repurchases and a 7% dividend increase. ME&T free cash flow was $2.4 billion. Financial Products reported strong customer financial health, with past dues at a 25-year Q2 low of 1.62% and retail new business volume at a 10-year Q2 high, reflecting the success of merchandising programs.

    AI-generated summary of the company’s earnings call. Not investment advice.