Andrew R.J. Bonfield
Chief Financial Officer at Caterpillar
Thank you, Jim, and good morning, everyone.
As usual, I'll begin with a high-level summary of the third quarter and then provide more detailed comments, including the performance of the segments. I'll then discuss the balance sheet and free cash flow before concluding with comments on our assumptions for the full year and the fourth quarter.
Beginning on Slide 8. Although sales and revenues were lower than we had expected, our adjusted operating profit margin was 20.0%, generally in line with what we had anticipated. Adjusted profit per share was in line with our expectations despite adjusted operating profit being impacted by the lower sales and revenues. I will highlight a few of the moving parts in a moment.
As Jim mentioned, our full year margin expectations remain unchanged, and we continue to anticipate the adjusted operating profit margin will be above the top end of the target range despite the slightly lower outlook for the top line. Our expectations for adjusted profit per share remain unchanged versus our expectations at the time of our last earnings call. Also, we have increased our expectations for ME&T free cash flow for the year, which we now anticipate will be near the top of our $5 billion to $10 billion target range.
In the third quarter, sales and revenues of $16.1 billion, decreased by 4% compared to the prior year. The adjusted operating profit margin of 20.0% was 80 basis points lower when compared to the prior year. Profit per share was $5.06 in the third quarter compared to $5.45 in the third quarter of last year. Restructuring costs were $0.11 in the quarter versus $0.07 in the prior year. Adjusted profit per share was $5.17 in the quarter compared to $5.52 last year.
Other income and expense was $119 million headwind versus the prior year mostly driven by an unfavorable currency impact related to ME&T balance sheet translation. We do not forecast the impact of foreign currency translation on our adjusted profit per share, so this acted as a headwind compared to our expectations for the quarter.
Excluding discrete items, the provision for income taxes in the third quarter in both 2023 and 2024, reflected a global annual effective tax rate of 22.5%. We recorded a discrete tax benefit, which had an $0.11 favorable impact within the quarter. We do not anticipate discrete items. Finally, the year-over-year impact from the reduction in the average number of shares outstanding primarily due to share repurchases resulted in a favorable impact on adjusted profit per share of approximately $0.26 as compared to the third quarter of 2023. This was slightly better than we had expected.
Moving to Slide 9, I'll discuss our top line results for the third quarter. Sales and revenues decreased by 4% compared to the prior year primarily impacted by lower sales volume as a result of lower sales to users and impacts from changes in dealer inventories. Total sales to users decreased by 6%, as a 10% decrease from Machines was partially offset by a 5% increase for Energy & Transportation. The impact from changes in total dealer inventories acted as a sales headwind of about $200 million in the quarter.
For machines-only, dealer inventory increased by about $100 million, a smaller increase than the $400 million increase in the prior year but slightly above our expectations of being flattish to slightly lower. Service revenues increased versus the prior year as we had anticipated.
Moving to operating profit on Slide 10. Operating profit in the third quarter decreased by 9% to $3.1 billion. Adjusted operating profit decreased by 8% to $3.2 billion mainly due to the impact of lower sales volume, partially offset by favorable price realization and manufacturing costs. Since early 2022, price realization has been strong and has often exceeded our expectations.
Over the past several quarters, we have highlighted that price will begin to moderate in the second half of this year. In the third quarter, this moderation began to occur as price realization was lower than previous quarters and generally in line with our expectations. As I mentioned for the third quarter, the adjusted operating profit margin was 20.0%, which was generally in line with our expectations.
By segment, margin in Construction Industries and Resource Industries was slightly below our expectations on lower volume, while Energy & Transportation was about in line. Financial Products had a slightly stronger quarter than we had expected.
On Slide 11, Construction Industries sales decreased by 9% in the third quarter to $6.3 billion, slightly below our expectations. The decrease versus the prior year was primarily due to lower sales volume and unfavorable price realization. The decrease in sales volume was mainly driven by lower sales of equipment to end users. Changes in dealer inventories also acted as a slight headwind to sales.
By region, Construction Industries' sales in North America decreased by 11%, and Latin America sales increased by 19%. Sales in the EAME region decreased by 15%, and Asia-Pacific sales declined by 12%. Third quarter profit for Construction Industries was $1.5 billion, a 20% decrease versus the prior year. This is mainly due to the profit impact of lower sales volume and unfavorable price realization. The segment's margin of 23.4% was a decrease of 300 basis points versus the prior year.
Turning to Slide 12. Resource Industries' sales decreased by 10% in the third quarter to $3.0 billion, which was slightly point below our expectations. The decline versus the prior year was primarily due to lower sales volume mainly driven by lower sales of equipment to end users, given the challenging comparison to the prior year. Third quarter profit for Resource Industries decreased by 15% versus the prior year to $619 million. This was mainly due to the profit impact of lower sales volume. The segment's margin of 20.4% was a decrease of 140 basis points versus the prior year.
Now on Slide 13. Energy & Transportation sales increased by 5% in the third quarter to $7.2 billion, slightly lower than we had expected driven by the timing of deliveries. The increase versus the prior year was primarily due to federal price realization and higher sales volume, including higher intersegment sales. By application, power generation sales increased by 26%. Transportation sales were higher by 3%. Oil and gas sales decreased by 1%, and industrial sales decreased by 16%. Third quarter profit for Energy & Transportation increased by 21% versus the prior year to $1.4 billion. The increase was mainly due to favorable price realization. The segment's margin of 19.9% was an increase of 270 basis points versus the prior year.
Moving to Slide 14. Financial Products revenues increased by 6% to about $1 billion, primarily due to higher average earning assets driven by North America and higher average financing rates across all regions. Segment profit increased by 21% to $246 million. This was mainly due to a favorable impact from equity securities and a lower provision for credit losses. Our customers' financial health is strong. Past dues remain near historic lows of 1.74% in the quarter, down 22 basis points versus the prior year. Our allowance rate was 0.87%, our lowest on record.
Business activity at Cat Financial remains healthy. Our retail new business volume increased by 17% versus the prior year, supported by our financing packages for customers choosing to buy Caterpillar equipment. Though Caterpillar's retail machine sales volume was lower, proportionally more sales are being financed through Cat Financial, which highlights the attractiveness of the financing options we are offering to our customers. We also continue to see healthy demand for used equipment, and inventories remain at low levels. Conversion rates are also strong as customers choose to buy equipment at the end of their lease term.
Moving on to Slide 15. We generated about $2.7 billion in ME&T free cash flow in the quarter -- third quarter and deployed about $1.5 billion in share repurchases and dividends. Our balance sheet remains strong with an enterprise cash balance of $5.6 billion. In addition, we hold $1.8 billion in slightly longer-dated liquid marketable securities to improve yields on that cash.
Now on Slide 16, I'll share our high-level assumptions for the full year. For the full year, we have updated our outlook to reflect sales and revenues that are slightly lower than our expectations at the time of our last earnings call, driven by lower-than-expected third quarter sales and an update to our expectations for dealer rental fleet loading in Construction Industries. We continue to anticipate services growth in 2024. As I mentioned earlier, our full year expectations for adjusted operating profit margin and adjusted profit per share remain unchanged compared to our last earnings call. We continue to expect adjusted operating profit margin to be above the top end of the target range.
In addition, we are increasing our expectations for ME&T free cash flow for the year, which we now anticipate to be near the top of our $5 billion to $10 billion target range. To assist you with your modeling for the full year, we now anticipate capex of around $2 billion, and restructuring costs of approximately $400 million. Our expectation for the global annual effective tax rate, excluding discrete items, remains at 22.5%.
Turning to Slide 17. I'll provide a few comments on the fourth quarter, starting with the top line. We expect slightly lower sales and revenues in the fourth quarter compared to the prior year, impacted by lower machine sales to users versus a strong comparison. On machine dealer inventory, our planning assumptions include the expectation that dealers will reduce their inventories in the fourth quarter while balancing the need to be prepared for 2025.
The magnitude of the decline of machine dealer inventory is expected to be less than the $1.4 billion decrease we saw in the fourth quarter of 2023. For perspective, we expect machine dealer inventory to end the year around same level as year end 2023. Also, the ongoing benefit of our services initiatives is expected to positively impact sales in the fourth quarter.
By segment in the fourth quarter compared to the prior year, we anticipate a sales decrease in Construction Industries. This is impacted by lower sales to users, which Jim mentioned, along with unfavorable price realization. In Resource Industries, we expect slightly lower sales impacted by lower sales to users versus a strong fourth quarter of 2023. In Energy & Transportation, we anticipate slightly higher sales versus the prior year, supported by power generation. Enterprise margin in the fourth quarter is expected to trend lower compared to the third quarter following the typical seasonable pattern. However, versus the prior year, we expect a modestly higher adjusted operating profit margin despite lower sales.
We anticipate favorable manufacturing costs and lower SG&A and R&D expenses will more than offset the profit impact of lower sales volume. Lower SG&A and R&D expenses are primarily driven by the benefit of lower short-term incentive compensation versus a higher expense in the prior year quarter. Price realization from Machines is expected to trend lower as the pricing environment continues to normalize, though price in Energy & Transportation should act as a partial offset.
Regarding price expectations for Machines, it is important to note that discounts to dealers occur through post-sales merchandising programs, which impact our results over time. This includes financing support from Cat Financial, which is an effective way of supporting our customers, and we cover a portion of that support over the life of the deal.
Let me explain. Based on the current level of price discounting support, we reserve for the anticipated payments to dealers for these merchandising programs. At times, there is a lag between the timing of the invoice of the dealer and when the dealer invoices the customer, which impacts the reserve. Over the next few quarters, we expect the impact from these merchandising programs to drive a headwind to machine price realization as we continue to adjust the reserve to reflect the current level of price discounting support.
By segment in the fourth quarter, in Construction Industries, we anticipate lower margin compared to the prior year, primarily due to unfavorable price realization, partially offset by favorable manufacturing costs. In Resource Industries, we anticipate lower margin in the fourth quarter compared to the prior year mainly due to lower volume and prioritization of strategic investments around services growth and AACE, which is Autonomy, Alternative fuels, Connectivity and Digital and Electrification. Favorable manufacturing costs should act as a partial offset. In Energy & Transportation, we expect a higher margin versus the prior year primarily impacted by favorable price realization.
So turning to Slide 18. Let me summarize. Although sales and revenues were lower than we had expected, adjusted operating profit margin and adjusted profit per share were generally in line with our expectations. We now anticipate our top line for the full year will be slightly below our prior estimate. Our backlog increased slightly and remains at a very healthy level.
Our expectations for full year adjusted operating profit margin, and adjusted profit per share remained unchanged compared to a quarter ago. We continue to expect adjusted operating profit margin to be above the top end of the target range for the full year based on our expected sales levels. We are now increasing our expectations for ME&T free cash flow, which we anticipate to be near the top of our target range for the full year.
Our team executed well in the quarter, and our results continue to benefit -- to reflect the benefit of the diversity of our end markets and the disciplined execution of our strategy for long-term profitable growth.
And with that, we'll now take your questions.
