Jim Umpleby
Chairman and Chief Executive Officer at Caterpillar
Thanks, Ryan. Good morning, everyone. Thank you for joining us. As we close out the first half of 2022, I want to thank our global team for delivering another good quarter with double-digit top line and adjusted profit per share growth despite ongoing supply chain challenges. Our second quarter results reflect healthy demand across most of our end markets. We remain focused on executing our strategy for long-term profitable growth. In today's call, I'll begin with my perspectives on our performance in the quarter and then I'll provide some insights on our end markets. Lastly, I'll provide an update on our sustainability journey.
For the quarter, sales were broadly in line with our expectations as we generated better-than-expected price and strong services revenue, which were offset by lower-than-expected sales to users. Similar to previous quarters, our top line would have been even stronger, if not for supply chain constraints. We remain focused on executing creative solutions to help mitigate our supply chain challenges. Overall, we remain encouraged by the strong demand in our end markets for our products and services. We're seeing strong momentum in services due to our service initiatives and investments. As I mentioned at our Investor Day in May, our confidence is increasing that we'll achieve our goal to double services to $28 billion by 2026.
Operating profit margins came in slightly lower than our expectations, mostly due to lower-than-expected volume and unfavorable mix. Price realization more than offset manufacturing cost increases, which occurred earlier in the year than we had anticipated. However, this is the only, this only partially offsets the impact of volume and mix. Dealer inventory remains at the low end of the typical range and rental fleets continue to age as dealers prioritize trying to meet the demand from retail customers. Orders remained solid and our backlog grew by approximately $2 billion in the quarter. We expect a volume and price realization to improve in the second half of the year, which should lead to sales growth in the remaining quarters of the year, both sequentially and year-over-year.
We also expect adjusted operating profit margins will improve both sequentially and year-over-year in the second half of 2022 as our price realization will more than offset manufacturing cost increases. Despite ongoing inflation and supply chain challenges, we continue to expect to achieve our Investor Day adjusted operating profit margin and ME&T free cash flow targets for the full year. Moving to slide four. Sales and revenues increased by 11%, broadly in line with our expectations. The increase was primarily driven by strengthening price realization and higher sales volume. Second quarter sales and revenues increased across our three primary segments versus the prior year, with sales higher in all regions, except EAME. Sales in North America rose by 18%, with double-digit growth in the three primary segments.
Strength in Latin America continued as 27% sales growth was supported by strong construction activity. In EAME, sales decreased by 3%, primarily due to currency impacts. Asia Pacific sales increased by 3% as lower sales in China were more than offset by stronger sales elsewhere within the region. Compared to the second quarter of 2021, sales to users declined 3%. For machines, including Construction Industries and Resource Industries, sales to users decreased by 4%, while Energy & Transportation was flat overall. Sales to users were below our expectations largely due to the impact of supply chain constraints.
These constraints were mostly due to component shortages, which resulted in production delays and shortfalls against our schedules. For example, engine control modules have continued to be one of the most significant bottlenecks mostly due to the shortage of semiconductors. We were unable to completely satisfy strong customer demand for our machines and engines and continue to incur additional costs due to factory inefficiencies and freight expenses. Sales to users in Construction Industries decreased 4%, primarily due to weakness in China and continued supply chain constraints. North America sales to users declined slightly, mainly due to supply chain challenges. Latin America saw higher sales to end users, while EAME declined slightly.
Asia Pacific sales to users were down in the quarter. However, excluding China, the Asia Pacific region, sales to users increased. The same holds true for Construction Industries overall. In Resource Industries, sales to users decreased 2% due to supply chain challenges and one-off disruptions, including commissioning delays. Orders remained strong, although slightly lower than recent high levels. We continue to see high equipment utilization and parked trucks remain at low levels, both supporting continued demand for our equipment and services. In Energy & Transportation, sales to users were flat versus the prior year. Oil and gas sales to users were down in the second quarter due to lower turbine and turbine-related services, which were partially offset by continued improvement in reciprocating engines.
As we mentioned during our last earnings call, we expected solar turbines new equipment shipments to be lower in the first half. Power generation and industrial sales to users remained strong due to favorable market conditions. Transportation decreased slightly. Now I'll spend a moment on dealer inventory. Dealer inventory declined by about $400 million in the second quarter, reflecting typical seasonality similar to the second quarter of last year. Dealer inventories remain near the low end of the typical range and we continue to work closely with our global dealer network to satisfy customer demand. As a reminder, dealers are independently owned businesses. Operating profit increased 9% in the quarter to $1.9 billion. The increase was driven by higher sales across our three primary segments, which largely reflected favorable price realization and volume and was partially offset by higher manufacturing costs and SG&A and R&D expenses.
High manufacturing costs in the quarter reflected increased material and freight costs. As I mentioned, favorable price realization more than offset manufacturing cost increases. Operating profit margins were 13.6% in the second quarter of 2022 compared to 13.9% in the second quarter of last year. Although our adjusted operating profit margins improved sequentially in the quarter, they were slightly lower than our expectations, mostly due to lower-than-expected volumes and unfavorable mix. Andrew will discuss the consolidated and segment-level margins in a few minutes. Our profit per share was $3.13 versus $2.56 in the second quarter of 2021. The adjusted profit per share was $3.18 versus $2.60 in the second quarter of last year. Now to slide five. We generated $1.1 billion of ME&T free cash flow in the quarter. We continue to expect to be within our $4 billion to $8 billion ME&T free cash flow range for the full year 2022. Andrew will discuss this in more detail. Regarding capital deployment. In the quarter, we repurchased $1.1 billion of stock and returned $600 million in dividends to shareholders. In May, our Board approved a new authorization to repurchase an additional $15 billion of common stock, which was effective on August 1.
We also announced we're increasing our quarterly cash dividend by 8% to $1.20 per share. We remain proud of our dividend aristocrat status. We continue to expect to return substantially all of our ME&T free cash flow to shareholders over time through dividends and share repurchases. Now on slide six, I'll share some high-level assumptions on our expectations for the full year. Overall demand remained healthy across our segments. However, the environment remains challenging, primarily due to continuing supply chain disruptions. Our teams are working hard to mitigate the supply chain challenges, and we expect to achieve our
Investor Day targets for adjusted operating profit margins and ME&T free cash flow. We expect continued top line growth for the second half of the year, reflecting healthy demand, favorable price realization and our team's persistent efforts to mitigate supply chain disruptions. As I mentioned, our total backlog increased by about $2 billion in the quarter, led by Energy & Transportation. The backlog for Resource Industries and Construction Industries remain elevated. Although we continue to anticipate inflationary pressures in manufacturing costs, we expect price will more than offset these cost increases for the full year. Now I'll turn to our expectations for key end markets this year. In Construction Industries in North America, we expect nonresidential construction to continue to be strong due to construction backlogs.
We also expect the ramping of projects from the U.S. Infrastructure Investment and Jobs Act to occur in late 2022 and into 2023. Residential construction is moderating from the very strong levels experienced since early 2021. In China, the above 10 tonne excavator market was very strong during the first half of 2021. During our last earnings call, we indicated that the industry would be slightly lower than 2019 levels. We now anticipate the industry will be lower than we previously expected. The rest of the Asia Pacific region is expected to grow due to higher infrastructure spending and commodity prices. In EAME, the EU has proposed an infrastructure investment package. However, business activity has moderated. Strong growth continues for construction activity in Latin America due to supportive commodity prices.
Overall, we expect healthy demand for the remainder of the year in Construction Industries. In Resource Industries, while our mining customers continue to display capital discipline, commodity prices remain supportive of investment despite recent moderation. We expect production and utilization levels will remain elevated and our autonomous solutions continued to gain momentum. We expect the continuation of high equipment utilization and a low level of park trucks, which both support future demand for our equipment and services. We continue to believe the energy transition will support increased commodity demand over the medium and long term, expanding our addressable market and providing opportunities for profitable growth. In heavy construction and quarry and aggregates, we expect continued growth in 2022. In Energy & Transportation, we expect improving momentum in 2022 with strong order rates in most applications.
In oil and gas, although customers remain disciplined, we remain encouraged by continued strength in reciprocating engine orders, especially for large engine replacements as asset utilization increases. In 2022, while solar services are expected to remain steady, new equipment orders strengthened significantly in the first half particularly in oil and gas, indicating sales growth in late 2022 and into 2023. Power generation orders remain healthy due to positive economic growth and continued data center strength. Industrial remains healthy with continued momentum in construction, agriculture and electric power. In rail, North American locomotive sales are expected to remain muted. We also anticipate growth in high-speed Marine as customers upgrade aging fleets.
Moving to slide seven. Since our last quarterly earnings call, we published our 2021 sustainability report in May to highlight progress on our sustainability journey. In the report, we reiterated our commitment to further enhance our sustainability reporting and disclosures by utilizing the task force on climate-related financial disclosures, or TCFD, framework and also committed to begin reporting estimated Scope three greenhouse gas emissions in 2023. As we continue to advance our sustainability journey through the second quarter of 2022, Caterpillar and our customers announced a number of projects that will help contribute to a lower carbon future. In May, we announced a low carbon intensity fuel project with District Energy St. Paul to demonstrate a combined heat and power, or CHP system, fueled by various combinations of hydrogen and natural gas.
CHP systems from Caterpillar provide both electricity and heat simultaneously, increasing overall efficiency and reducing exhaust emissions. With support and partial funding from the U.S. Department of Energy, the demonstration project will compare how hydrogen and hydrogen blends can be integrated into a waste heat and power solution. This quarter, we also announced the acquisition of Tangent Energy Solutions, a U.S.-based energy as a service company. Tangent's suite of intelligent energy solutions will allow us to provide value to customers by helping them reduce energy costs, increase energy efficiency, reduce emissions, monetize electric good support and provide resiliency for their operations. In summary, we continue to support our customers' climate-related objectives with new equipment and services that facilitate fuel transition increase operational efficiency and reduce emissions. We remain committed to contributing to a reduced carbon future as we help our customers build a better, more sustainable world.
With that, I'll turn the call over to Andrew.
