Andrew Bonfield
Chief Financial Officer at Caterpillar
Thank you, Jim and good morning, everyone. I'll begin by covering our fourth quarter results, including the performance by our business segments. Then I'll cover the balance sheet and ME&T free cash flow before concluding on high level assumptions for 2023, including the first quarter. Beginning on slide 9; sales and revenues for the fourth quarter increased by 20% or $2.8 billion to $16.6 billion. The sales increase versus the prior year was due to strong price realization and volume, partially offset by currency impacts. Sales were higher than we expected as supply chain constraints eased in some areas and we were able to ship more product.
Operating profit increased by 4% or $69 million to $1.7 billion as strong price realization and volume growth were mostly offset by a goodwill impairment charge, higher manufacturing costs and restructuring expenses. Our adjusted operating profit was $2.8 billion, up $1.2 billion versus the prior year, and the adjusted operating profit margin was 17.0%. This was an increase of 560 basis points versus the prior quarter due to favorable price realization and volume growth, which outpaced manufacturing cost increases.
Fourth quarter margins were lower than we were targeting as well as being lower than where we needed them to be to meet our full-year Investor Day margin target. I will talk more about that in a moment. Adjusted profit per share increased by 43% to $3.86 in the fourth quarter compared to $2.69 in the fourth quarter of last year. Adjusted profit per share in the fourth quarter excluded goodwill impairment charge of $925 million or $1.71 per share related to our Rail division, as Jim has explained. This charge is held at the corporate level and does not impact Energy & Transportation segment margins.
Adjusted profit per share figures also exclude mark-to-market gains for the re-measurement of pension and OPACC plans and restructuring items. Restructuring costs of $209 million or $0.29 in the quarter were primarily related to non-cash inventory write-downs within our Rail division. Again, these charges impact at the corporate level and the inventory write-downs are within cost of goods sold in the income statement. For the full year, restructuring costs were about $600 million. Last quarter, we told you that a non-cash charge of approximately $600 million could slip into 2023, which it did.
We expect to close on the divestiture of longwall business in early February and the non-cash charge will be included in our first quarter 2023 restructuring charges. The provision for income taxes in the fourth quarter excluding the amounts relating to mark-to-market, goodwill impairment and other discrete items reflects at a global annual effective tax rate of approximately 23%, as we had expected. Finally, our fourth quarter results including unfavorable non-cash foreign currency impact within other income and expense of $0.41 related to ME&T balance sheet translation in the quarter.
To explain, many of our foreign entities are U.S. dollar functional. These entities are generally in a net liability position, causing a favorable translation impact in periods of U.S. dollar strength. Within each of the first three quarters, we saw some benefit as the dollar sequentially trended stronger. However, within the fourth quarter, this trend reversed. Given the significant weakening of the U.S. dollar within the fourth quarter of 2022, the negative impact to profit was sizeable. As you would imagine, our forward-looking assumptions do not include expectations for currency fluctuations.
To give a bit more context, other income and expense excluding the impact of pension mark-to-market adjustments has trended around $250 million of income per quarter for all of 2021 and for the first three quarters of 2022. This is reflected in a number of offsetting items, including currency. In the fourth quarter, excluding pension mark-to-market, other income and expense swung to a $70 million expense. The majority of that change is due to the foreign exchange translation adjustment, which is why we have highlighted this. Overall, sales were better than we had expected, as we had anticipated margins increase, but as I said earlier, not by enough to meet our Investor Day margin targets.
Adjusted profit per share rose by 43%, but that was moderated by the $0.41 non-cash foreign currency balance sheet translation charge that I mentioned a moment ago. Moving on to slide 10; the 20% increase in the topline was driven by favorable price realization and higher sales volume. Volume was supported by the $800 million year-over-year impact of changes in dealer inventory and an 8% increase in sales to users. From a sales perspective, currency remained a headwind, given the strength of the U.S. dollar. As I mentioned earlier, sales were higher than we expected in the quarter, mostly due to some improvements in the supply chain, which enables stronger shipments particularly in Construction Industries. The increase in dealer inventories reflects the improved shipments in Construction Industries and customer delivery timing in Resource Industries and Energy & Transportation.
Overall market dynamics remain healthy as sales to users continued to increase and our backlog is strong at $13.4 billion. Moving to slide 11; fourth quarter operating profit increased by 4%, impacted by the goodwill impairment charge and restructuring expenses. Adjusted operating profit increased by 78% as favorable price realization and higher sales volume continued to outpace higher manufacturing costs. Manufacturing costs increased primarily due to higher material costs and unfavorable costs absorption as we decreased our inventories in the fourth quarter compared to an increase in the prior year.
Related to our recent price cost performance, keep in mind that we are still catching up from the increases in manufacturing costs, which have occurred over the last few years. In particular, material freight costs have increased by about 20% since 2020 and as full-year gross margins remain below our 2019 levels. Our fourth quarter adjusted operating profit margin of 17% was a 560 basis point increase versus the prior year. As Jim has mentioned, this is our highest ever quarterly adjusted operating margin.
As I said earlier, we did not achieve our Investor Day margin targets. As Jim said, in a high inflation environment, you do not get the benefit of operating leverage that you would normally expect when sales increases are volume driven. You will recall that our margin targets are progressive, which means that the top end of the range, for every $1 billion in sales incremental revenues, we need to deliver close to 40 percentage points of that through adjusted operating profit. This is challenging to achieve in a high inflation environment when sales are increasing due to price realization designed to mitigate increases in manufacturing costs.
Also, please keep in mind that we made a conscious decision to continue to invest for future profitable growth. We have not seen inflation anywhere near double-digit levels since the targets were introduced in 2017. In a low inflation environment, productivity improvements can be made to offset inflationary increases, so nominal targets remain effective. In the current high inflation environment, you cannot achieve the level of productivity. So we are adjusting the target for sales range to reflect the inflationary increases we've seen in 2022.
On slide 12, we've updated our margin target slope to account for the impact of inflation as depicted on the chart. We still have the same aspirations for margins. However, the corresponding level of sales and costs are generally around 9% higher than they'd have been in a non-inflationary environment. As you can see, the low end of the sales range is now $42 billion, while the top end is $72 billion. This compares to the previous bookends of $39 billion and $66 billion, respectively.
The key point is that, despite the inflationary impact on sales and costs, which impact margins, our expectations for profits and cash generation have not changed and we remain focused on delivering increases in absolute OPACC dollars. Depending on the inflationary environment that we see in 2023, we'll have to revisit the range next January. Moving to slide 13, across our three primary segments, sales and margins improved in the fourth quarter versus the prior, supported by price realization and sales volume.
As expected, price more than offset manufacturing costs in all three segments. Starting with Construction Industries, sales increased by 19% in the fourth quarter to $6.8 billion, driven by favorable price realization and sales volume, partially offset by currency. Volume increased primarily due to changes in dealer inventory and higher sales to users. Dealer inventory increased in the quarter compared to a reduction last year. Sales in North America rose by 34%, due mostly to strong pricing, the positive change in dealer inventory and higher sales to users.
Sales in Latin America increased by 39% on strong price realization and higher sales volume, the latter due mostly to a favorable change in dealer inventory. In the EAME, sales increased by 10% on price realization and sales volume, partially offset by unfavorable currency. Sales volume was supported by positive year-over-year change in dealer inventory as the decrease in the prior year's quarter was larger than this year's decline. Sales in Asia-Pacific decreased by 10%, mostly due to unfavorable currency impacts, partially offset by stronger price realization.
Lower sales volume also contributed to the decline as dealers decreased inventory during the fourth quarter compared to an increase in the prior year. Fourth quarter profit for Construction Industries increased by 87% versus the prior year to $1.5 billion. Price realization and higher sales volume drove the increase. Unfavorable manufacturing costs largely reflected high material costs, unfavorable cost absorption and increased freight. The segment's operating margin of 21.7% was an increase of 780 basis points versus last year.
The margin for the quarter was better than we'd expected on strong volume, price and moderating material costs. As a reminder, the fourth quarter is usually the weakest quarter for margins in construction industries, but the with the benefit of price realization, the reverse was true in 2022. Turning to slide 14; resource Industries sales grew by 26% in the fourth quarter to $3.4 billion. The improvement was primarily due to favorable price realization and higher sales volume. Volume increased due to the impact of changes in dealer inventories and higher sales of equipment to end users.
Dealer inventory increased more during the fourth quarter 2022 than the prior year due to the timing of customer deliveries, which includes the impact of outbound logistics delays and commissioning. Fourth quarter profit for Resource Industries increased by 110% versus the prior year to $605 million, mainly due to favorable price realization and higher sales volume. This was partially offset by higher manufacturing costs, primarily material, freight and volume related manufacturing costs. The segment's operating margin of 17.6% was an increase of 700 basis points versus last year, strengthening versus third quarter, as we had expected.
Now on slide 15; Energy & Transportation sales increased by 19% in the fourth quarter to $6.8 billion, with sales up across all applications. Oil and gas sales increased by 38% due to higher sales of turbines and turbine related services, reciprocating engines and aftermarket parts. Power generation sales increased by 12% as sales were higher in large reciprocating engines, supporting data center applications. Sales increased in small reciprocating engines, turbines and turbine related services as well. Industrial sales rose by 19%, with strength across all regions.
Finally, transportation sales increased by 6%, benefited by marine applications and reciprocating engine aftermarket parts. Rail services were offset by lower deliveries of locomotives. Fourth quarter profit for Energy & Transportation increased by 72% versus the prior year to $1.2 billion. The improvement was primarily due to higher sales volume and favorable price realization. Higher manufacturing and SG&A and R&D costs acted as partial offset. Manufacturing cost increases largely reflected high material costs and volume related manufacturing costs. SG&A and R&D expenses increased due to investments aligned with our strategic initiatives, including electrification and services growth. The segment's operating margin of 17.3% was an increase of 530 basis points versus last year, strengthening versus third quarter as we had expected.
Moving to slide 16; Financial Products revenue increased by 10% to $853 million, benefited by higher average financing rates across all regions. Segment profit decreased by 24% to $189 million. The profit decrease was mainly due to a higher provision for credit losses at Cat Financial and an unfavorable impact from equity securities in insurance services. The increase in provisions reflects changes in general economic factors, rather than company specific economic factors. Despite these changes, our leading indicators remain strong. Past dues were 1.89% compared with 1.95% at the end of the fourth quarter of 2021.
Also, this was an 11 basis point decrease in past dues compared to the third quarter of 2022. Retail new business volume declined versus the prior year, but remained steady compared to the third quarter. As I mentioned last quarter, Cat Financial is not seeing slowing business activity, but continues to see strong competition from banks due to higher interest rates and more customers willing to pay cash for their machines. Used equipment demand remains strong, with inventories at historically low levels. We continue to see high conversion rates as well, as customers choose to buy at the end of the lease term.
Now on slide 17; ME&T free cash flow in the quarter increased by about $1.2 billion versus the prior to $3 billion. The increase was primarily due to higher profit. On working capital, our inventory decreased by about $600 million in the quarter. Improved availability of some components benefited shipments as we decreased our work-in-process inventory. We also saw strong shipments of solar turbines in the quarter. We repurchased about $900 million of common stock in the quarter and paid around $600 million in dividends.
As Jim mentioned, we generated $5.8 billion in ME&T free cash flow for the year, inclusive of capex of about $1.3 billion. We are pleased with the strong free cash flow we generated in a year where we paid $1.3 billion in short term incentive compensation and increased our inventories by over $2 billion. Our liquidity remains strong with an enterprise cash balance of $7 billion and another $1.5 billion and slightly longer-dated liquid marketable securities, which generate improved yields on that cash. Now on slide 18. I'll share some high level assumptions for the full year, followed by the first quarter.
As we begin 2023, demand remains constructive given the strong order backlog and improving supply chain dynamics, although we do not expect the benefit of a dealer inventory tailwind like we saw last year. As a reminder, dealer inventory rose by $2.4 billion in 2022. Around 40% of the increase related to Construction Industries, with the balance reflecting the timing of deliveries to customers in Resource Industries and Energy & Transportation. As Jim mentioned, about 70% of the combined end dealer inventory in Resource Industries and Energy & Transportation is supported by customer orders.
For the full year 2023, we anticipate increased sales supported by price realization. Although we expect stronger sales to users in 2023, the headwind from the $2.4 billion dealer inventory build in 2022 will moderate volume growth. Our planning assumption is that we do not expect a significant change in dealer inventory by the end of the year. We do expect service sales momentum to continue after reaching $22 billion in 2022. From a sales seasonality perspective, we expect a more typical year with lighter first quarter for total sales. For the full year, we expect our adjusted operating profit to increase, reflecting higher sales, and we expect to be within our updated adjusted operating margin ranges.
Pricing actions from 2022 will continue to roll into 2023, and we will evaluate future actions as appropriate to offset inflationary pressures. We currently expect to see a moderation of input costs inflation as the year progresses, and therefore a corresponding moderation in price realization as we move through the year. Price, though, should still more than offset manufacturing costs for the year. Increases in SG&A and R&D expenses are expected to exceed the benefit of lower short term incentive compensation expense this year as we continue to invest in strategic initiatives, such as services growth and technology, including digital, electrification and autonomous.
Below operating profit, we anticipate a headwind of approximately just over $800 million or about $80 million per quarter in other and income and expense at the corporate level related to pension expense due to higher interest costs, given higher interest rates. This is a non-cash item. For the full year of 2022, the strengthening U.S. dollar acted as a tailwind of $189 million relating to the ME&T balance sheet translation impact that I spoke about earlier. This would not recur if the weakening we've seen in rates thus far continues.
Based on current rates, we'd see a headwind of around about $80 million in the first quarter. Remember that 2022 was not a typical year for us as margins increased sequentially through the year as the benefit of price realization was stronger in the second half of the year. Also, manufacturing volumes were impacted by supply chain issues, which did impact absorption rates from quarter to quarter. These factors will mean that we do not expect to return to our normal seasonal margin patterns in 2023. Moving on, we expect to achieve our ME&T free cash flow target of $4 billion to $8 billion for the year, with capex in the range of about $1.5 billion.
We'll have about a $1.4 billion cash outflow in the first quarter related to the payout of last year's incentive compensation, slightly higher than we saw in the first quarter of 2022. We anticipate restructuring expenses of around $700 million this year, the majority of which is related to the long haul divestiture charge that I mentioned earlier. Finally, we anticipate a global effective tax rate of 23% excluding discrete items. Now on to our assumptions for the first quarter; in the first quarter compared to the prior year, we expect sales to increase on price and slightly stronger volume, reflecting higher sales to users.
With regard to dealer inventory, we expect a typical seasonable build in the first quarter of this year. As a reminder, dealers increased inventories by $1.3 billion in the first quarter of 2022, and we expect a lower build in the first quarter of 2023. Sales should increase across the three primary segments in the first quarter versus the prior. Compared to the fourth quarter, we anticipate lower sales in the first quarter at the enterprise level, following our typical seasonal pattern. We expect lower sales sequentially in each of our three primary segments as well.
To provide some color; construction Industries is following an abnormally strong fourth quarter, where shipments exceeded our expectations. Resource Industries had a strong fourth quarter, with its highest quarterly shipments since 2012, and expects lower sequential sales in the first quarter due to the timing of shipments which, as you know, can be lumpy. Energy & Transportation sales should be sequentially lower as well, following normal seasonal patterns. Keep in mind that solar turbines had a strong fourth quarter.
Specific to the first quarter versus the prior year, keep in mind that first quarter margins last year were very low. We expect substantially strong enterprise and segment margins in the first quarter on favorable price and volume. Price realization should more than offset manufacturing costs above the [Technical Issues] primary segment levels as well. Also, we could see headwinds related to pension and currency below operating profit, as I have just mentioned. Compared to the fourth quarter of 2022, we expect adjusted operating profit margins to be flattish to down for the first quarter of the year at the enterprise level.
Keep in mind that our fourth quarter of 2022 adjusted operating profit margins were our highest quarterly margins ever. By segment, in Construction Industries, we normally see higher margins in the first quarter. However, coming off a very strong fourth quarter, we expect lower volume to weigh on margin sequentially. This is the business which usually drives the enterprise-wide sequential margin improvement from the fourth quarter to the first. Similarly, lower volumes should drive sequentially lower margins in Resource Industries.
And in Energy & Transportation, we expect lower margins sequentially following a strong fourth quarter, which is the normal pattern for this business. Turning to slide 19; let me summarize. Sales grew by 20%, led by strong price realization and volume gains across three primary segments. The adjusted operating profit margin increased by 560 basis points to 17%. ME&T free cash flow was strong at $3 billion for the quarter, and we continue to return cash to shareholders on a consistent basis. Service revenues were $22 billion for the full year, a 17% increase as momentum built in 2022.
The outlook remains positive with improving supply chain dynamics and the backlog up around $400 million to over $30 billion. We've updated our margin target scope to account for the impact of inflation on sales and costs and we expect our 2023 adjusted operating margins to be within our updated range. Despite the inflationary impact on sales and costs, our expectations for profit and cash flow generation have not changed, and we will continue to execute our strategy for long-term profit growth. I want to confirm that full-year 2022 restructuring costs were about $300 million for the year. So apologies if we made an error in the call.
Now, I'll hand over to questions.
