Caterpillar Inc. 2026 Q2 Earnings Call

Thank you, Audra. Good morning, everyone, and welcome to Caterpillar's second quarter of 2026 earnings call. I'm Alex Kapper, Vice President of Investor Relations. Joining me today are Joe Creed, Chairman and CEO, Kyle Epley, Chief Financial Officer, Stephanie Baughman, Senior Vice President of the Global Finance Services Division, and Ryan Coleman, Senior Director of IR. During our call, we'll be discussing the second quarter earnings release we issued earlier today. You can find our slides, the news release, and a webcast recap at investors.caterpillar.com under Events and Presentation. The content of this call is protected by U.S. and international copyright law. Any rebroadcast, retransmission, reproduction, or distribution of all or part of this content without Caterpillar's prior written permission is prohibited. Moving to Slide 2. During our call today, we'll make forward-looking statements which are subject to risks and uncertainties.

We'll also make assumptions that could cause our actual results to be different than the information we're sharing with you on this call. Please refer to our recent SEC filings and the forward-looking statements reminder in the news release for details on factors that individually or in aggregate could cause our actual results to vary materially from our forecast. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. On today's call, we'll also refer to non-GAAP numbers. For a reconciliation of any non-GAAP numbers to the appropriate U.S. GAAP numbers, please see the appendix of the earnings call slides. For today's agenda, Joe will begin by sharing his perspectives about our results and highlighting initiatives across our segments.

He'll discuss our full year outlook and insights about our end markets, followed by a strategy highlight. Kyle will provide a detailed overview of results and will share key assumptions looking forward. We will conclude by taking your questions. Now, let's advance to Slide 3 and turn the call over to Joe Creed.

All right. Thanks, Alex, and good morning, everyone. Thanks for joining us today. In the second quarter, sales and revenues were better than expected at $20.5 billion, up 24% versus the prior year, driven by strong end market demand in all three of our primary segments. This is the first time in company history that we've generated over $20 billion of sales and revenues in a single quarter. This milestone underscores both the essential work our customers do every day and the dedication of Caterpillar employees worldwide to solving our customers' toughest challenges. We delivered adjusted profit per share of $8.17, an increase of 73% versus last year. Our backlog grew sequentially by $9 billion to $72 billion. This is an increase of approximately $35 billion or 92% compared to second quarter last year. All three primary segments contributed to both the year-over-year and sequential backlog growth.

Strong order rates and a growing backlog reflect broadening momentum across our business. In the quarter, we generated robust MP&E free cash flow of $5.1 billion and deployed $2.2 billion to shareholders through share repurchases and dividends. Now I'll discuss second quarter results in more detail. As I mentioned, sales and revenues were $20.5 billion, and the increase versus prior year was primarily driven by strong growth in sales volume from higher sales to users in all three primary segments and favorable price realization. Second quarter sales and revenues were better than expected due to strong sales volume growth in Construction Industries and Resource Industries. While Power & Energy was broadly in line with our expectations. Adjusted operating profit margin was 21.9%. Second quarter adjusted operating profit margin was better than we anticipated, primarily due to IEEPA tariff recoveries of $392 million and lower than expected tariff costs.

The margin benefit from better than expected sales volume was mostly offset by higher SG&A and R&D expense. For tariffs introduced since the beginning of 2025, excluding IEEPA recoveries, costs were about $400 million in the quarter. This was lower than the estimate we provided in April due to favorable adjustments to the computation of tariffs previously incurred. Kyle will explain in more detail in a moment, including the impact to each segment. Now I'll review second quarter retail statistics. Sales to users grew in all three of our primary segments. In Power & Energy, sales to users grew a robust 33%. Power generation grew 72%, driven by very strong demand for large gen sets and turbines used in data center applications. Sales to users in oil and gas increased 6% and were driven by reciprocating engines, turbines, and turbine-related services sold into gas compression applications.

Industrial sales to users were down due to a decline in engines sold into marine applications. Construction Industries total sales to users grew for the sixth consecutive quarter, up 22%. Increases in North America were better than we anticipated as the growth was driven by very strong rental fleet loading and equipment sold into non-residential and residential construction. Dealers' rental revenue continues to grow in North America, requiring more investment in their equipment fleets. This quarter, rental loading was a positive contributor to sales to user growth as compared to second quarter last year when rental loading was a headwind. Sales to users increased in EAME due to strength in Europe and Africa, but were lower than we anticipated due to softness in the Middle East. In Asia Pacific, growth was driven by China. The softness outside of China kept the overall region below our expectations.

Latin America grew as we anticipated. For Resource Industries, second quarter sales to users increased 17%, which was in line with our expectations. Sales to users were higher year-over-year in mining, as well as heavy construction and quarry and aggregates. Rail growth was driven by international locomotive deliveries. Turning to slide four, I will cover a few highlights since our last earnings call, starting with Power & Energy. To support the demand growth in power generation and oil and gas applications, we are excited to resume production of our 10-megawatt medium-speed gas reciprocating engine platform. This highly efficient platform is well-suited for prime power generation, and its power rating fits between our high-speed gas reciprocating engines and industrial gas turbines. In 2022, we stopped manufacturing this product and focused on supporting aftermarket sales and services, given the limited industry opportunity at that time.

Now, without significant investment, we are able to restart production by leveraging our existing supply base, along with our internal capacity and capability. We plan to bring about 1.5 gigawatts of capacity back online, and shipments are expected to begin in the fourth quarter. This is a clear example of how our agility and diverse portfolio help us stay ahead of customer needs, respond quickly, and turn opportunities into profitable growth. Moving on to Construction Industries. In the second quarter, we delivered our first units to Major Projects, which is a specialized, fully Cat dealer-owned rental joint venture focused on supporting customers with multibillion-dollar projects across North America. Major Projects will serve customers developing large-scale infrastructure, including transportation, energy, manufacturing, and data center builds.

It is a supplemental national rental solution to help deliver larger size class construction equipment and capabilities where existing individual dealer rental fleets are not sufficient to execute at scale. We believe Major Projects will expand our presence in the rental industry and make it easier for large contractors to do business with us and our dealers. Finally, Resource Industries completed the acquisition of Skycatch in July, further enhancing our capabilities following the recent acquisition of RPMGlobal. Skycatch's technology captures high-frequency, high-precision, large-scale spatial data and pairs it with a suite of AI capabilities. That allows customers to identify, measure, and interact with the data, resulting in improved decision-making, reduced delays, and greater confidence in daily operations. This is another example of investment in technology-enabled growth that will help our mining customers operate more efficiently and achieve better outcomes. On slide five, I will provide an update on our outlook.

We continue to see strong momentum in our end markets, despite ongoing uncertainty due to geopolitical events. We are increasing our full-year 2026 sales and revenues expectations to mid to high teens growth based on the healthy demand we are seeing across all three of our primary segments. We are also progressing in our capacity expansion plans, and we expect to increase our throughput in the second half of the year. As a result, we anticipate stronger full-year growth across all three primary segments compared to the outlook we gave in April. Services revenues are also expected to grow at a higher rate for the full year compared to our previous outlook. The improved outlook is also supported by the breadth and duration of our record backlog. As I mentioned, all three of our primary segments contributed to backlog growth.

Power & Energy customers continue planning with us by sharing their long-term forecasts. Some are placing orders as far out as 2030. Currently, 59% of our $72 billion backlog is expected to be delivered over the next 12 months. This percentage has been fairly stable over the past three quarters, which demonstrates the momentum in all three primary segments. Moving on to adjusted operating profit margin. We expect the full-year adjusted operating profit margin to be higher than we expected during our last earnings call, reflecting the improved sales and revenues outlook. Excluding the favorable impact from IEEPA tariff recoveries in the second quarter, we expect full-year adjusted operating profit margin to be near the bottom of the target range. Our full-year margin expectation reflects the strategic investments we are making to execute our growth strategy, as well as the ongoing impact of tariffs.

While the situation around tariffs remains fluid, we continue to execute our mitigation plans. Kyle will provide more detail on a revised full-year estimate for tariffs in a moment. I'm confident that we'll manage the impact of tariffs over time as we aim to operate around the midpoint of our adjusted operating profit margin target range. We are also increasing our MP&E free cash flow expectations to be in the top half of our annual target range, reflecting our improved outlook. I'll now discuss our key end markets, starting with Power & Energy. Our positive outlook for 2026 continues to reflect strong demand in power generation and oil and gas. Strong second quarter performance has set a solid foundation for continued growth for the remainder of the year.