Andrew R.J. Bonfield
Chief Financial Officer at Caterpillar
Thanks, Jim, and good morning, everyone. I'll begin with commentary on the fourth quarter results, including the performance of our segments. Then I'll discuss the balance sheet and cash flow, followed by an update to our target ranges for adjusted operating profit margins and ME&T free cash flow. I'll conclude with our high-level assumptions for 2024 and our expectations for the first quarter.
Beginning on Slide 9. Strong operating performance continued in the fourth quarter as sales and revenues, adjusted operating profit margin, adjusted profit per share, and ME&T free cash flow were all better than we had expected. In summary, sales and revenues increased by 3% to $17.1 billion. Adjusted operating profit increased by 15% to $3.2 billion. The adjusted operating profit margin was 18.9%, an increase of 190 basis points versus the prior year. Profit per share was $5.28 in the fourth quarter compared to $2.79 in the fourth quarter of last year. Profit per share in the quarter included favorable mark-to-market gains of $0.14 for the re-measurement of pension and OPEB plans and certain favorable deferred tax valuation adjustments of $0.04. It also included restructuring costs of $92 million, or $0.13. Adjusted profit per share increased by 35% to $5.23 in the fourth quarter compared to $3.86 last year.
The provision for income taxes in the fourth quarter, excluding the amounts related to mark-to-market and discrete items, reflected a global annual affected tax rate of 21.4%. This was lower than we had expected a quarter ago due to favorable changes in the geographic mix of profits. The lower rate benefited performance in the quarter by about $0.24.
Moving on to Slide 10. I'll discuss top-line results in the fourth quarter. The 3% sales increase versus the prior year was primarily driven by price realization, partially offset by lower volume as impacts from dealer inventory changes more than offset the 8% increase in sales to users. Both price and volume were slightly better than we had anticipated. The dealer inventory change resulted in an unfavorable sales impact of $1.6 billion versus the prior year. Dealer inventory decreased in the fourth quarter by $900 million overall compared to an increase of approximately $700 million during the fourth quarter of 2022. The dealer inventory decrease in the fourth quarter was led by construction industries, where the reduction was at the high end of our expectations. The decrease in this segment was led by excavators and the impact of the Cat engine changeover in building construction products that we have mentioned in previous earnings calls.
Dealer has also reduced their inventories and resource industries. Overall, the decrease in dealer inventory of machines was $1.4 billion in the quarter. Conversely, dealer inventory in energy and transportation increased mostly due to extended commissioning timelines, resulting from strong shipments which were supported by healthy demand. As a reminder, dealer inventory in both energy and transportation and resource industries is mainly a function of the commissioning pipeline, and over 70% of dealer inventory in these segments is backed by firm customer orders.
Looking at sales by segment, sales in construction industries and energy transportation was slightly higher than we had anticipated, while sales in resource industries were about in line with our expectations.
Moving to operating profit on Slide 11. Adjusted operating profit increased by 15% to $3.2 billion. Price realization and favorable manufacturing costs benefited the quarter, while higher SG&A and R&D expenses and lower sales volumes acted as a partial offset. The increase in SG&A and R&D expenses was primarily driven by higher short-term incentive compensation expense and strategic investment spend. The adjusted operating profit margin of 18.9% improved by 190 basis points versus the prior year. Margins were slightly higher than we had anticipated on volumes and price being marginally better than we had expected.
Now on Slide 12. Construction industry sales decreased by 5% in the fourth quarter to $6.5 billion due to lower sales volume, partially offset by favorable price realization. Lower sales volume was primarily due to the changes in dealer inventories that I mentioned earlier and more than offset the favorable sales to users. The dealer inventory changes impacted all of the regions. By region, sales in North America increased by 4%. In Latin America, sales decreased by 25%. Sales in EAME increased -- decreased by 18%. This region accounted for the largest dealer inventory decline in the quarter. In Asia-Pacific, sales decreased by 4%.
Fourth quarter profit for construction industries was $1.5 billion, an increase by 3% versus the prior year. The increase was primarily due to favorable price, partially offset by the profit impact from lower sales volume. The segment's operating margin of 23.5% was an increase of 180 basis points versus last year. This was broadly in line with our expectations.
Turning to Slide 13. Resource industry sales decreased by 6% in the fourth quarter to $3.2 billion. The decrease was primarily due to lower sales volume, partially offset by favorable price realization. Lower volume was impacted by changes in dealer inventories as dealers decreased inventories during the fourth quarter of 2023 compared to an increase in the prior year's quarter. Volume was also impacted by slightly lower aftermarket part sales volume, partly due to dealer buying patterns. Fourth quarter profit for resource industries decreased by 1% versus the prior year to $600 million. The segment's operating margin of 18.5% was an increase of 90 basis points versus last year and was in line with our expectations.
Now on Slide 14. Energy and transportation sales increased by 12% in the fourth quarter to $7.7 billion. The increase was primarily due to higher sales volume and favorable price realization. Sales volume benefited from higher shipments of large engines and solar turbines and turbine-related services in the quarter. By application, oil and gas sales increased by 23%, power generation sales were high by 29%, industrial sales decreased by 5%, and transportation sales increased by 11%. While industrial sales decreased, they remain at healthy levels.
Fourth quarter profit for energy and transportation increased by 21% versus the prior year to $1.4 billion. The increase was primarily due to favorable price and higher sales volume, partially offset by higher SG&A and R&D expenses, currency impacts, and unfavorable manufacturing costs. The increase in SG&A and R&D expenses reflected ramping investments related to strategic growth initiatives and higher short-term incentive compensation expense.
As a reminder, most of our strategic investments relating to electrification and alternative fuels are in energy and transportation, which therefore impacts this segment's margin. The operating margin of 18.6% was an increase of 130 basis points versus the prior year. Margin exceeded our expectations on higher volume, including favorable mix and price.
Moving to Slide 15. Financial products revenues increased by 15% to $981 million, primarily due to higher average financing rates across all regions and higher average earning assets in North America. Segment profit increased by 24% to $234 million. The increase was mainly due to a lower provision for credit losses at Cat Financial, higher average earning assets, and a high net yield on average earning assets.
Our portfolio continues to perform well with past dues near historic levels at 1.79%. We saw a 10-basis point improvement compared to the fourth quarter of 2022 and a 17-basis point improvement compared to the third quarter and the lowest fourth quarter past dues percentage since 2006.
The year-end allowance rate was our lowest fourth quarter rate on record at 1.18% and was the second lowest quarterly rate ever. In addition, provision expense in 2023 was at the lowest level we've seen in over 20 years.
Business activity remained strong as retail new business volume increased versus the prior year and the third quarter. The increase versus the prior year reflected higher end user sales and rental conversions in the U.S. In addition, we continued to see strong demand for used equipment. Though used inventories have ticked up slightly, they remain close to historically low levels. Despite some moderation in used pricing on improved availability, it is still comfortably above historic norms.
Moving on to Slide 16. The record $10 billion in ME&T free cash flow for the year included $3.2 billion in the fourth quarter, an increase of $200 million versus the prior year. On capex, we continue to make disciplined investments that are right for our business, governed by our focus on growing absolute OPEC dollars. We spent about $1.7 billion in 2023. Looking to 2024, we expect capex in the range of $2 billion to $2.5 billion. This is higher than our recent run rate and includes the investment in large engine capacity, which Jim referenced a moment ago.
We also plan to invest more around ACE, which is Autonomy, Alternative Fuels, Connectivity, and Digital and Electrification. In addition, we are investing to make our supply chain more resilient.
Moving to capital deployment. We returned $3.4 billion to shareholders in the fourth quarter, including $2.8 billion in share repurchases. Our net share count has decreased by approximately 14% since 2019, when we shared our intention to return substantially all ME&T free cash flow to shareholders over time and on a consistent basis. Our dividend remains a priority as we increased our quarterly payout by 8% in 2023. You will recall from our Investor Day in 2022, we shared that we were expected to increase our dividend by at least high-single-digits for the next three years. The increase in 2023 reflected the second of those three years.
Our balance sheet remains strong. We have ample liquidity with an enterprise cash balance of $7 billion. And we hold an additional $3.8 billion in slightly longer-dated liquid marketable securities to improve yields on that cash.
Now on Slide 17. I'll discuss our revised adjusted operating profit margin targets. We exceeded our progressive target range in 2023 and we are confident that our strong execution and operating performance supports the potential for higher top-end adjusted operating profit margins than were reflected in the prior range. Therefore, we have increased the top end of the range by 100 basis points relative to the corresponding level of sales. Achieving the top end of the range will remain challenging as we are committed to increase investments in our strategic initiatives supporting long-term profitable growth.
The bottom end of the target range remains unchanged. To explain, while higher gross margins support increasing the top end of the range, they actually pressure our margins in periods of decreasing volume. For that reason, we believe that the bottom end of the range remains challenging, but achievable. We will now target adjusted operating profit margins of 10% to 14% at $42 billion of sales and revenues, increasing to 18% to 22% at $72 billion of sales and revenues.
Now on Slide 18. When I joined Caterpillar just over five years ago, I was impressed with the potential of our business to deliver higher, more consistent ME&T free cash flow as a result of the operating and execution model, and our focus on generating absolute OPEC dollars. This is how we define winning at Caterpillar. We believe increasing absolute OPEC dollars will lead to higher shareholder returns over time. Since the beginning of 2019, we have generated $30 billion in ME&T free cash flow, including a record $10 billion in 2023. We are confident in our ability to consistently generate positive ME&T free cash flow over time. Therefore, we are introducing an updated target range for ME&T free cash flow, which is between $5 billion and $10 billion. Our strong operating performance as well as confidence in our future execution supports the higher range.
The updated target range still maintains our flexibility to invest in our strategic initiatives, which is a priority. We'll also continue to expect to return substantially all of our ME&T free cash flow to shareholders over time through dividends and share repurchases.
Moving to Slide 19. I will share our high-level assumptions for the full year. As Jim mentioned, in 2024, we anticipate sales and revenues will be broadly similar to 2023. We expect slightly favorable price realization and continued healthy underlying demand across the business as a whole. We anticipate another year of services growth as we continue to target $28 billion by 2026. We do not expect a significant change in dealer inventory for machines by the end of this year. And for energy and transportation, it is difficult to predict with certainty what will happen to dealer inventory as we have discussed previously. In total, dealer inventory increased by $2.1 billion in 2023.
By segment, in construction industry, sales of equipment to end users should remain roughly similar compared to the strong year we saw in 2023. However, we do not expect a dealer inventory build as we saw last year. We also anticipate our services initiatives will benefit the segment in 2024. In resource industries, we anticipate lower sales versus 2023 impacted by lower machine volume, primarily in off-highway and articulated trucks. We had strong sales of these products in 2023 as we converted our elevated backlog into sales, making for a challenging comparison. We also anticipate an unfavorable year-over-year change in dealer inventories. However, we expect services revenues will increase in this segment. In energy and transportation, we expect slightly higher sales in 2024. Power generation, oil and gas, and transportation sales should be positive, while industrial sales are expected to be lower compared to historically strong levels in 2023.
On full-year adjusted operating profit margin, we currently expect to be in the top half of the updated margin target range at our expected sales levels. I'll discuss some of the puts and takes.
In 2024, we expect a small pricing benefit weighted towards the first half of the year given carry-over from increases taken in the second half of 2023. For the full year, we expect price to modestly exceed manufacturing costs. Versus last year, price in absolute dollar terms should moderate as we lap the more favorable pricing trends from 2023. Short-term incentive compensation expense was about $1.7 billion in 2023 while we anticipate $1.2 billion in 2024. We expect the benefit of that low expense will be offset by increases in SG&A and R&D expenses as we continue to invest in strategic initiatives aimed at future long-term profitable growth. Investments are focused in services, new product introductions, and ACE. We also anticipate there will may be some negative margin impact due to mix this year. I'll explain.
During 2023, when availability was somewhat challenged, we biased our production and shipments to products with the highest OPEC potential. Given that availability has improved, we anticipate a more normalized mix of products in 2024. We may also see an impact on margins from the mix of different segments as we anticipate in sales in 2024 will be slightly more weighted towards energy and transportation than they were in 2023.
Moving on, we expect to be within the top half of our updated ME&T free cash flow target range of $5 billion to $10 billion. As you consider our cash position, keep in mind the $1.7 billion cash outflow in the first quarter related to the payout of last year's incentive compensation expense. We also anticipate restructuring charges of $300 million to $450 million this year. Finally, we expect a global effective tax rate in the range of 22.5% to 23.5%, an increase versus the 21.4% in 2023.
Now on Slide 20, our expectations for the first quarter starting with the top-line. We expect first quarter sales and revenues to be broadly similar to the prior year. We anticipate price to be favorable, although significantly less in absolute dollar terms than had occurred through 2023. We expect demand to remain healthy. However, we anticipate a slightly lower deal inventory build for machines in the first quarter compared to a $1.1 billion build in the first quarter of 2023. This will act as a headwind to sales. At the segment level, in construction industries, we anticipate flattish to slightly higher first-quarter sales versus the prior year, primarily due to favorable price. We anticipate lower sales and resource industries compared to the prior year, driven by lower volume, partially offset by favorable price.
In energy and transportation, we expect flattish to slightly higher sales versus the prior year, with updated favorable volume benefiting the upside scenario. On margins, we expect the enterprise adjusted operating profit margin in the first quarter to be broadly similar to the first -- prior year. Price should more than offset manufacturing costs as price actions from 2023 roll into 2024. We expect price will be low in absolute dollar terms versus the prior year. We anticipate manufacturing costs to increase compared to last year, principally impacted by cost absorption as we do not expect an inventory build like we saw in the first quarter of 2023. We also anticipate an increase in SG&A and R&D expenses related to strategic investment spend.
By segment, in construction industries, we anticipate a similar margin as compared to the prior year. We expect price to offset strategic investment spend and slightly higher manufacturing costs, including cost absorption. In resource industries, we expect a lower margin compared to the prior year impacted by lower volume partially offset by favorable price. In energy and transportation, we anticipate expect a similar margin versus the prior year, a slightly stronger price should be offset by higher manufacturing costs.
Turning to Slide 21, let me summarize. Adjusted profit per share of $21.21 exceeded our previous full-year record by 53%. We exceeded the top ends of our targeted ranges for adjusted operating profit margin and ME&T free cash flow. We have increased the top end of our adjusted profit margin range and we have raised our ME&T free cash flow target range. We expect to be in the top half of our updated margin and ME&T free cash flow target ranges in 2024, and we anticipate another year of services growth as we continue to execute our strategy for long-term profitable growth.
And with that, we'll take your questions.
