Data‑Hungry AI Pushes Caterpillar’s Power and Backlog to Record Highs

Record year framed by an unusually long order book

Caterpillar marked its centennial year with the kind of numbers that tend to puncture any talk of late‑cycle fatigue. Sales and revenues for 2025 reached $67.6bn, the highest in the company’s history, and the fourth quarter alone delivered a record $19.1bn, up 18 per cent year‑on‑year. More striking still was what did not ship: a record $51bn backlog that now stretches, in some cases, into 2027 and beyond.

Chief executive Joe Creed cast that swelling order book as a symbol of both market strength and strategic repositioning. Roughly 62 per cent of the backlog is expected to deliver in the next 12 months, a noticeably lower share than in the past, reflecting a deliberate shift toward multi‑year commitments in power and energy as Caterpillar works with customers to align factory slots with long‑dated project timelines.

The company’s adjusted operating margin for 2025 came in at 17.2 per cent, squarely within its target range despite an explicit $1.7bn net tariff headwind. Adjusted profit per share was $19.06. On cash generation, the picture was similarly robust: $9.5bn of Machinery, Energy & Transportation (MP&E) free cash flow, the third consecutive year above $9bn, funded $7.9bn of capital returns via buybacks and dividends. Caterpillar’s dividend aristocrat status, now in its 32nd consecutive year of increases, remains intact.

For investors, though, the real story is where the growth is coming from—and how tariffs are reshaping the margin profile beneath the surface.

Power & Energy becomes the growth engine

The gravitational center of Caterpillar’s portfolio is shifting decisively toward its Power & Energy segment, propelled by a wave of data center and AI‑related demand that is beginning to reshape both its factories and its forward guidance.

In Q4, Power & Energy sales rose 23 per cent to $9.4bn, beating internal expectations on stronger‑than‑anticipated shipment volumes, particularly in power generation and oil and gas. Segment profit climbed 25 per cent to $1.8bn, with a 19.6 per cent margin—up slightly year‑on‑year even after absorbing around 220 basis points of tariff impact.

For the full year, power generation sales exceeded $10bn, more than 30 per cent higher than in 2024, and the company underscored that this is not a one‑off spike. Caterpillar has committed to more than doubling both its large engine capacity and its industrial gas turbine capacity by 2030, a build‑out originally framed around a 50GW installed power target presented at its Investor Day.

The order backdrop is increasingly dominated by data centers and cloud infrastructure:

• Sales to users in Power & Energy jumped 37 per cent in Q4, with double‑digit growth in every application.
• Power generation sales to data center applications grew 44 per cent, driven by demand for large generator sets and turbines.
• Oil and gas benefited from strong demand for turbines and turbine‑related services, particularly for gas compression.
• Industrial applications staged a recovery from low levels, and transportation saw higher international locomotive deliveries.

The most vivid illustration of this power pivot came not in the figures but in an announcement timed with the call. Caterpillar disclosed an order from American Intelligence and Power Corporation for 2GW of reciprocating generator sets for prime power at the Monarch Compute Campus—a project with a total potential of about 8GW. It is one of Caterpillar’s largest single orders for complete power solutions and will enter the backlog in the first quarter of 2026, with deliveries stretching from late 2026 through 2027.

Creed noted that this is one of four orders Caterpillar has secured with at least 1GW of equipment for data center prime power. Most of that capacity will be provided by natural gas generator sets, with battery storage playing only a supporting role in what are effectively on‑site microgrids. For Caterpillar, these prime power installations are doubly attractive: they generate large upfront equipment revenue and set up heavy, recurring service cycles as engines run continuously and move into overhaul territory three to five years after installation.

The constraint is not demand but metal. Chief financial officer Andrew Bonfield made clear that the 2026 top‑line guide—enterprise sales and revenues growing around the top of a 5–7 per cent long‑term CAGR—is shaped by what Caterpillar is confident it can build, not the volume of orders it is being offered. In Power & Energy, the pace of growth will be “paced by the timing of bringing capacity increases online” over the next several years, with the first meaningful step‑up in large engine capacity expected towards the end of 2026 and into 2027. Turbine capacity will follow slightly later.

Construction and mining: solid, but overshadowed

While Power & Energy dominated the numbers, Caterpillar’s more traditional franchises in Construction Industries and Resource Industries quietly delivered the kind of steady progress that underpins the group’s multipronged growth narrative—even as tariffs gnawed away at margins.

In Construction Industries, Q4 sales increased 15 per cent to $6.9bn, supported by an 11 per cent rise in sales to users, the fourth consecutive quarter of growth. North America was the standout, with stronger‑than‑expected non‑residential and residential construction underpinned by federal infrastructure spending and a nascent uplift from data center build‑outs. Dealer rental fleet loading and rental revenue both grew.

EAME and Asia‑Pacific ex‑China trended broadly in line with expectations, and Latin America outperformed with sales to users rising. For 2026, Caterpillar expects another year of growth in construction sales to users, with:

• North America remaining positive, buoyed by IIJA funding, other infrastructure programmes and a further acceleration in data center‑related construction.
• EAME benefiting from an improving European macro backdrop and steady activity in Africa and the Middle East.
• Asia‑Pacific ex‑China seeing moderate growth, with China itself expected to show “positive momentum” from a low base in the above‑10‑ton excavator segment.
• Latin America continuing to grow at rates similar to 2025.

Yet the segment’s profitability tells a different story. Construction Industries’ Q4 profit fell 12 per cent year‑on‑year to $1bn, and its margin dropped 470 basis points to 14.9 per cent, with tariffs alone accounting for roughly 600 basis points of pressure. Slightly unfavourable price realization and higher incentive compensation erased the benefit of stronger volume.

Resource Industries, which spans mining, heavy construction, and (for now) rail, posted a 13 per cent rise in Q4 sales to $3.4bn, largely on the back of dealer inventory movements. Sales to users declined 7 per cent, in line with expectations, as mining customers kept a tight grip on capital spending, particularly in coal. Still, order activity was healthy, with one of the strongest quarters since 2021 supported by heavy construction in North America and mining orders in South America, especially for copper.

Here too, margins felt the sting of trade policy. Segment profit fell 24 per cent to $360mn, and margin shrank 510 basis points to 10.7 per cent, of which around 490 basis points was attributed to higher manufacturing costs from tariffs. Additional drag came from higher short‑term incentive compensation and slightly unfavourable price.

Beneath the quarterly noise, Resource Industries remains central to Caterpillar’s autonomy and technology story. The installed base of autonomous haul trucks rose to 827 by year‑end, up from 690 in 2024, as the company pushes towards a 2030 goal to triple the number of CAT autonomous trucks in operation compared with the 2024 baseline. Recent wins include an agreement with Brazilian dealer Sotreq to provide Vale with an autonomy solution for a mixed fleet of more than 90 trucks, a sign that Caterpillar’s systems are increasingly able to support heterogeneous fleets rather than just pure‑CAT sites.

Tariffs: a growing bill and a new reporting lens

If the AI‑driven boom in power generation is the tailwind reshaping Caterpillar’s revenue profile, tariffs are the headwind warping its margin trajectory. Bonfield’s prepared remarks lingered on tariff math in a way that underscored their materiality.

In 2025, Caterpillar faced $1.8bn in new tariffs, mitigated by around $100mn of specific cost‑control actions directly tied to tariff exposure, leaving a net incremental impact of $1.7bn. Excluding tariffs, the company said its full‑year adjusted operating margin would have been in the top half of its target range at 2025’s sales level. In the fourth quarter specifically, adjusted margin was lower by 270 basis points year‑on‑year, but higher than the prior year once tariffs are stripped out.

The company is now changing how it communicates on this topic. Going forward, Caterpillar will report only the absolute incremental tariff costs versus a 2024 baseline, and will treat broader pricing and cost‑control measures as part of normal operations rather than as tariff offsets. For 2026, those incremental tariff costs are expected to reach approximately $2.6bn—about $800mn more than in 2025. Without the mitigating actions planned for this year, Bonfield said, the tariff bill would be roughly 20 per cent higher.

Tariffs are also expected to be front‑loaded. Caterpillar anticipates around $800mn of incremental tariff costs in the first quarter of 2026, similar to the quarterly run rate seen in 2025, with some improvement in the second half as sourcing and other mitigation measures take effect. The impact will be unevenly distributed:

• Roughly 50 per cent of incremental tariffs in Q1 are expected to hit Construction Industries.
• Around 20 per cent will fall on Resource Industries.
• The remaining 30 per cent will be absorbed by Power & Energy.

The company’s guidance is bifurcated accordingly. Excluding the impact of tariffs, Caterpillar expects its 2026 enterprise adjusted operating margin to be in the top half of its target range at the planned sales level, supported by volume growth and roughly 2 per cent price realization. Including tariffs, margin is expected to land near the bottom of that range.

These economics have real segment‑level consequences. Bonfield cautioned that, after accounting for tariffs, all three primary segments are likely to show lower margin percentages in 2026 than in 2025, even as sales grow. In effect, tariffs are absorbing much of the profit pull‑through from higher volume, at least in the near term.

Balance sheet strength, capital allocation, and services

One reason investors have thus far tolerated the tariff‑induced erosion in margin percentage is that the absolute dollar earnings and cash flows continue to grow, and Caterpillar has been disciplined in how it deploys them.

MP&E free cash flow of $9.5bn in 2025 came despite an $800mn increase in capital expenditures. The company expects free cash flow to be “slightly lower” in 2026, reflecting a further step‑up in capex to about $3.5bn, largely tied to capacity expansions in engines and turbines. Even so, Caterpillar is signalling that shareholders will remain the prime beneficiaries of whatever free cash is left after growth investments. In 2025, 84 per cent of MP&E free cash flow was returned via $5.2bn of share repurchases and $2.7bn in dividends, and Bonfield flagged that the company plans to enter into a larger accelerated share repurchase in the first quarter of 2026 than the $3bn ASR executed early last year.

The balance sheet gives it room to manoeuvre. Enterprise cash at year‑end stood at $10bn, supplemented by $1.2bn in slightly longer‑dated liquid marketable securities as Caterpillar seeks to improve yield on excess liquidity. At Cat Financial, the financing arm, conditions appear benign: financial products revenues grew 7 per cent to about $1.1bn in the quarter, segment profit rose 58 per cent to $262mn, and credit metrics were at or near record bests, with past dues down to 1.37 per cent and the allowance rate at just 0.86 per cent. Retail credit applications and new business volumes were both up, and used equipment demand remained healthy with low inventories and elevated conversion rates at lease‑end.

Services revenues, a cornerstone of Caterpillar’s 2030 strategy, reached $24bn in 2025. The company now has more than 1.6mn connected assets in its installed base, and it highlighted progress in condition monitoring, prioritized service events, e‑commerce and tech‑enabled machines. The 2030 goal remains $30bn in services revenue, a target that should be flattered over time by the expansion of high‑utilization power and energy fleets and by the growing population of autonomous mining equipment.

A refreshed strategy for an AI‑era industrial

Beyond the numbers, Creed used the call to sketch the contours of a refreshed enterprise strategy launched after last November’s Investor Day. The mission—“solving our customers’ toughest challenges”—is organized around three pillars for profitable growth: commercial excellence, advanced technology leadership, and transforming how the company works, all anchored in what management calls “continued operational excellence”.

The technology strand is more than rhetoric. Caterpillar started 2026 with a keynote presence at CES in Las Vegas, where it sought to recast itself in the eyes of Silicon Valley and Wall Street alike as a key architect of what it calls the “invisible layer of the tech stack”: the critical minerals, power infrastructure, and physical construction that underpins every data center, AI training cluster and cloud region. It unveiled a new CAT AI assistant intended to make it easier for customers to buy, maintain, manage and operate equipment, and it pledged $25mn to support workforce development in advanced industrial technologies.

In that sense, the quarter’s results and the forward guidance trace a through‑line from the physical to the digital. Record sales, a record backlog and heavy capex are being driven as much by the needs of data‑hungry hyperscalers as by traditional infrastructure cycles. At the same time, tariffs and rising strategic investments in capacity and digital tools are compressing margins even as they expand the top line.

For investors, Caterpillar now presents itself as a company in transition: still recognizably a bellwether for construction and mining, but increasingly leveraged to the power demands of AI and cloud computing. How effectively it can convert that demand into sustained, tariff‑resilient profitability will likely define its next decade as much as earthmoving did the last.