Caterpillar (CAT, Financial) experienced a decline in its Q1 2025 earnings, missing both EPS and revenue expectations due to falling sales volume and margin pressure. All three main operating segments reported year-over-year sales declines, with Construction Industries (CI) seeing a significant 19% drop, affected by weak demand in both residential and non-residential construction markets.

Despite the challenges, Caterpillar's backlog grew by a record $500 million in Q1, indicating strong customer demand and revenue visibility for FY25 and beyond. However, short-term sales are likely to be pressured by ongoing dealer inventory reductions, with a $600 million sales headwind in CI alone.

• Q1 EPS fell by 24% year-over-year to $4.25, driven by a 10% drop in total sales and a 390-bps decrease in adjusted operating profit margin to 18.3%. Caterpillar expects Q2 adjusted operating margin to be lower year-over-year due to lower price realization and tariff-related cost headwinds of $250-$350 million.
• Overall sales volume in Machinery, Energy & Transportation decreased by $1.10 billion, impacted by lower sales to users and dealer inventory drawdowns in CI and Resource Industries (RI). CI faced a $250 million pricing headwind due to aggressive post-sales programs and competitive pressures.
• Sales in RI declined by 10% to $2.88 billion due to reduced mining equipment demand and changes in dealer inventories, influenced by softer commodity prices and lower mining activity outside of precious metals.
• Energy & Transportation (E&T) showed relative strength, with sales down only 2% to $6.57 billion, benefiting from a $255 million price increase. Robust demand for power generation equipment, especially for data centers, provided resilience, although lower rig activity in oil and gas offset these gains.

Caterpillar's Q1 results highlight a challenging environment with lower sales volume, unfavorable pricing, and margin compression driven by weak construction and mining demand. Tariffs, high borrowing costs, and competitive pricing remain headwinds for Q2. In the event of negative economic growth in 2H25, Caterpillar expects a modest year-over-year revenue decline for FY25, supported by a strong backlog. However, negative dealer inventory trends and rising macroeconomic uncertainty pose growth challenges.