Andrew Bonfield
Chief Financial Officer at Caterpillar
Thanks, Jim, and good morning everyone. I'll begin with a recap of Caterpillar's fourth quarter results, including the performance of each segment. Then, I'll comment onto the balance sheet and cash flow before concluding with a few assumptions about the first quarter and full year 2022.
Starting with the fourth quarter on slide 8, our sales and revenues rose by 23% or $2.6 billion to $13.8 billion. Volume growth led the way and was broad-based as demand remained strong. Operating profit increased by 17% to $1.6 billion as volume growth and favorable price were partially offset by freight, material, and short-term incentive compensation headwinds. As Jim has mentioned, operating margins were lower than we had anticipated, primarily due to elevated freight costs and plant inefficiencies, which I'll discuss further in a few moments. Fourth quarter profit per share was $3.91 compared to $1.42 last year. We had our usual impacts from mark-to-market accounting for remeasurement of pension and OPEB plans, that included $1.19 per share, favorable in the fourth quarter of this year compared to $0.63 per share unfavorable last year.
Restructuring was actually a net income of $19 million in the quarter due to the gain on the sale of facility. In addition, some of our planned restructuring activities that we had originally expected to complete in the quarter were pushed back into 2022. We reported adjusted profit per share of $2.69 in the fourth quarter, compared to $2.12 last year. This performance included a lower than expected global tax rates and some discrete tax items, which together added approximately $0.36 to fourth quarter profit per share.
Now on slide 9. As we had anticipated, the topline for the fourth quarter was the strongest of the year, coming in slightly better than normal seasonality would imply. Dealer inventory provided about $1 billion tailwind versus the comparable quarter in 2020 when dealers reduced their inventories by $1.1 billion. Sales to users growth decelerated a bit sequentially, but remained strong despite a tougher comparison period, particularly in China. Price realization strengthened as we saw the benefit of additional price actions begin to flow through. Services continue to be a bright spot.
I want to take a moment to provide some color on dealer inventory. Caterpillar dealers typically hold between three and four months worth of inventory based on projected sales for the next 12 months. For the past year, they've been near the low end of that range. Because of strong sales to end-users and supply chain constraints, dealers have prioritized customer orders over building inventory. As a result, dealers have been unable to restock as would have been their normal practice. Given the current constrained environment, we don't expect to see a significant benefit from dealer restocking in 2022. Fourth quarter sales and revenues increased in every region.
In North America, our largest region, sales increased by 27% with strong growth in all three primary segments, but led by Construction Industries and Resource Industries. In EMEA, sales rose by 24% as fundamentals remained strong. Latin America sales grew by 38% from a low base. Asia-Pacific sales increased by 9% as gains in Energy & Transportation and Resource Industries more than offset lower revenues than Construction Industries. Excluding China, Construction Industries' sales in the regions grew versus the prior year's quarter. Just to remind you, the quarterly sales profile for China in 2020 was very different from the normal seasonable pattern with a strong second half due to the timing stimulus activity. In 2021, we have returned to more typical profile of a stronger first half of the year, ahead of the selling season. This has made for a particularly tough comparison as China sales were abnormally strong in the fourth quarter of 2020.
Now, let's review the bottom line on slide 10. Fourth quarter operating profit increased by $231 million or 17%, compared to the prior year's strong volume and favorable price realization with the principal drivers of the increase. Higher manufacturing costs and SG&A and R&D expenses partially offset these gains. Acceleration of freight, manufacturing inefficiencies, and material costs drove the manufacturing cost increases. The freight costs included both inflation in standard rates and the increased use of premium freight. The reinstatement of short-term incentive compensation had an impact on manufacturing costs and SG&A and R&D expenses, albeit at a slower rate than previous quarters.
Beginning in the second quarter, we told you that we had expected price realization to offset higher manufacturing costs for machines in 2021. We have come up just short of that goal as the unfavorable impacts of rising freight costs and the manufacturing inefficiencies during the fourth quarter were more significant than we expected. As we had noted previously, due to taking price action later in the year, we had expected a lag in Energy and Transportation price realization, so material cost increases and sharply rising freight costs negatively impacted Energy and Transportation margins, more significantly than they did for the machine groups.
Moving to margins. The adjusted operating profit margin was 11.4%, a decrease of 140 basis points with short-term incentive compensation expense, a headwind of roughly 150 basis points of margin in the quarter. As both, Jim and I, have acknowledged, margins for the fourth quarter deteriorated by more than we had expected. To provide a bit more perspective, we typically see margins decreased sequentially by between 100 to 200 basis points from the third quarter to the fourth quarter. However, in the fourth quarter of 2021, the spike in freight costs along with the plant inefficiencies that Jim described caused an additional unfavorable impact of around 100 basis points or so.
Most of this was due to the need to ship components using premium freights and factory inefficiencies that resulted from challenges caused by component shortages as we prioritized meeting customer demand. We believe that these margin headwinds are temporary and will only last as long as the supply chain challenges remain. Our price actions are designed to cover increases in underlying input costs, but do not anticipate factory inefficiencies or premium shipping, which had to be used to serve our customers. There is no doubt that this will impact some part of 2022, but it's impossible to be certain when these costs will be a little bad [Phonetic].
Now looking at the full year. Our adjusted operating profit margin was 13.7%. As Jim mentioned, we've achieved our 2019 Investor Day margin target of adjusted operating profit margins being 300 to 600 basis points better at a comparable level of sales to the reference period of 2010 to 2016. We've done so while investing in new product launches, services, and sustainability. Of note, R&D expense including higher short-term incentive compensation, increased by 19% for the full year. Our global effective tax rate for the fourth quarter was approximately 23% versus the 25% we have assumed previously. The improvement is primarily related to changes in the geographic mix of profits from a tax perspective. Adjusted profit per share was $2.69, reflecting the stronger volume, favorable price, as well as the lower-than-expected global tax rate.
Moving to slide 11. Let's take a look at the segment performance, starting with Construction Industries. Sales increased by 27% in the fourth quarter to $5.7 billion, primarily driven by strong sales volume and favorable price realization. The improvement in volume was due to a small reduction year-over-year in dealer inventories and higher end-user demand. End-user demand improved in three of the four regions. In North America, we saw our largest sales growth as non-residential demand continued to improve and housing construction remained supportive. End-user demand eased in Asia Pacific due to the challenging comparisons in China that I spoke about earlier. The segment's fourth quarter profit increased by 25% to $788 million on higher sales volume and favorable price realization. Cost increases related to material and freight were more than offset by price increases. However, the segment's operating margin decreased by 30 basis points versus last year to 13.7% due to the headwinds of factory inefficiencies and higher short-term incentive compensation expense.
Turning to slide 12. Resource Industries sales increased by 27% in the fourth quarter to $2.8 billion. The improvement was mostly due to high end-user demand and favorable price. End-user demand increased in mining as well as heavy construction and quarry and aggregates. Fourth quarter profit for Resource Industries increased by 12% to $305 million. Increased manufacturing costs including freight material costs and higher SG&A and R&D expenses were more than offset by higher selling -- sales volume and favorable price realization. The increase in SG&A and R&D expenses was driven by investments and higher short-term incentive compensation. In Resource Industries, price realization takes longer to come through results because of the equipment's longer lead times between the time of an order and date of delivery. However, as we progressed through 2022, we expect more benefits to flow through from the price increases we have taken. The segment's operating margin decreased by 150 basis points versus last year to 11.0%
Now on slide 13. Energy and Transportation sales increased by 19% to approximately $5.7 billion with sales up across all applications. That included a 22% sales increase in oil and gas, including aftermarket parts for reciprocating engines. Gas compression also supported reciprocating engine sales. Power generation sales increased by 7%, driven by reciprocating engine aftermarket part sales. Industrial sales rose by 29% with strength across many applications. Loss [Phonetic] Transportation rose by 17% on strong international rail deliveries and services in the quarter. Profit of Energy and Transportation decreased by 2% to $675 million.
Volume and price gains were more than offset by higher manufacturing costs, short-term incentive compensation expense, and investments in growth initiatives such as the energy transition. Keep in mind that the majority of our core investments in the energy transition, for example, in electrification, impact this segment. Freight costs increases were particularly significant in the quarter, driving the higher manufacturing costs. The segment's operating margin decreased by 250 basis points versus last year to 11.8%.
On slide 14, Financial Products had a very strong quarter. Revenue increased by 4% to $776 million. Segment's profit increased by 27% year-over-year to $248 million. The year-over-year profit increase is partly due to continued strong demand for used equipment where worldwide sales and new sales were our highest on record in 2021. The segment also benefited from a lower provision for credit losses at Cat Financial.
Moving to our credit portfolio, it's in good shape as customer health indicators remain positive. Past dues continue to improve across all portfolio segments to 1.95%, that's down 154 basis points year-over-year and down 46 basis points compared to the third quarter. It is the lowest past dues levels we've seen in 15 years. New retail lending hit an eight-year high in the fourth quarter.
On slide 15, ME&T free cash flow was $1.8 billion in the quarter, an increase of about $116 million versus the fourth quarter of last year. The increase was due to higher profit adjusted for non-cash items, which includes higher accruals with short-term incentive compensation. ME&T generated $6 billion in free cash flow this year, almost double compared to the prior year and in line with our Investor Day target of between $4 billion and $8 billion. We recently declared a quarterly dividend of $1.11 per share or around $600 million per quarter. In 2021, we paid around $2.3 billion in dividends. We are proud of our dividend aristocrat status, which we maintain following the 8% quarterly increase announced in June of last year. We completed $1 billion in share repurchases in the fourth quarter for a total of $2.7 billion in 2021.
In aggregate, we returned $5 billion to shareholders, which represents 83% of our ME&T free cash flow for 2021. Over the past four years, on average we've returned 99% of our ME&T free cash flow to shareholders. That aligns to our target to return substantially all of our ME&T free cash flow to shareholders over time. The Company ended the year with $9.3 billion in enterprise cash, a strong position. As always, given our Cat Finance organization which helps our customers acquire our equipment, we continue to maintain a strong balance sheet as we prioritize mid-A credit ratings.
Now slide 16. In light of the fluid environment, we will continue to not provide guidance for our annual profit per share. However, to assist with modeling the Company, we will continue to share some high-level assumptions for the upcoming quarter and full year. Looking to the first quarter, we expect the topline to increase versus the prior year on stronger end-user demand and higher prices. We also expect to see a dealer inventory increase, which will follow our normal seasonable pattern as dealers prepare for the spring selling season. However, we anticipate that increase will be slightly less than normal given the supply chain constraints and the high levels of committed orders. For the full year, we expect the environment to support strong end-user demand and higher pricing. The extent that we'll be able to fulfill that demand will be impacted by the supply chain challenges we've discussed today. As these alleviate, we would expect to see an acceleration in sales to end users. As we have noted, our order books and backlog are robust, but we do expect the supply chain to constrain our volumes.
Before I discuss margins, I want to highlight how unusual the last few years have been. In 2020, the full impact of the pandemic started to be felt from end of the first quarter. Whilst demand started to improve through 2021, we then started to see the impacts of commodity and freight inflation as well as significant supply chain pressures go through the year. This makes our normal quarterly facing more difficult to model as there are fundamental changes in the underlying comparatives that make historic norms less relevant.
Let me explain. In 2021, pricing was slow to ramp up and picked up in third and fourth quarters of the year, following mid-year October price increases. From a cost perspective, material and freight costs were about flat in the first quarter and then ramped up through to be at the highest and absolute terms in the fourth quarter. So that sets up our comparisons. Then in this year, we will begin this year with a carryover pricing from mid year and October 2021, and then we expect to have additional pricing in 2022. That's why we expect pricing to be more or less evenly spread across the quarters as we move through 2022. Then, we will lap those rising material and freight costs and manufacturing inefficiencies as we move towards the back half of the year, so we will have easier comparisons.
In a nutshell, we anticipate the greatest headwinds to margin in 2022 to occur in the first quarter. This is completely counter to the normal historic pattern of strong margins in the first quarter with margins decreasing sequentially to the fourth. We expect those headwinds to margins to abate as the year goes on, as we realize more price and as we lap the higher costs. More importantly, we intend price increases to more than offset manufacturing cost increases in 2022, assuming the current level of supply chain disruption does not deteriorate.
I'll provide a few more key assumptions for you to keep in mind as well. As short-term incentive compensation expenses anticipated to be around $1 billion for the year or $250 million per quarter, that's a $50 million tailwind in the first quarter. Also, we'll have about $1.3 billion cash outflow in the first quarter related to the payouts of losses incentive compensation. We anticipate an increase in R&D, reflecting continued acceleration investments related to initiatives such as sustainability, electrification, and digital. Restructuring spend should be a headwind for the year. We participate around $600 million in restructuring expense in 2022, compared to $90 million in 2021. The increase is larger than usual due to actions to address certain challenged products we've already announced, some of which were delayed a bit. Keep in mind that our adjusted profit per share calculation excludes restructuring costs. We also estimate prior restructuring actions will benefit 2022 by around $75 million. In addition, we assume an annual global effective tax rate of around 25%. Finally, we anticipate capex to be in the $1.4 billion range.
Turning to slide 17. Let me recap today's key points. We met our adjusted operating margin and ME&T free cash flow targets in the challenging year. End-user demand remained strong and in a challenging supply chain environment we kept our factories opened, maintained our production flexibility and recognized $2.6 billion more in revenues. We continue to execute our strategy for long-term profitable growth as we expand our offerings in preparation for the energy transition. We anticipate stronger sales volume in the first quarter versus the prior year, while margins will be pressured in the first quarter as costs remain elevated and the full benefits of pricing flow through evenly throughout the year.
With that, I'll take your questions.
