Andrew Bonfield
Chief Financial Officer at Caterpillar
Thank you, Jim. And good morning, everyone. I'll start by walking you through second quarter results, including some color on the segment performance. Then I'll turn to the balance sheet and our thoughts for the third quarter.
Beginning on Slide 8. As Jim noted, sales for the second quarter increased by 29% to $12.9 billion due to higher volumes. Operating profit of $1.8 billion increased by 128%, reflecting margin expansion primarily due to higher volumes. Second quarter profit per share was $2.56 compared with $0.84 in 2020. Adjusted profit per share more than doubled to $2.60 compared with $1.27 last year.
I'll start with the top line on Slide 9 where we continue to see strong volume gains. Sales and revenue growth was in the double-digits percent for all three of our primary segments and on a consolidated basis for every region. Growth in North America, our largest region, is up 30%, reflecting strong results in Construction Industries and Resource Industries.
Growth in EAME was also robust, up 33%. Latin America rose by 67%, albeit of it's low base. And Asia Pacific sales grew by 12%. Overall sales to users increased by 15%. The acceleration from the 8% rate of growth in the first quarter was in line with our expectations of a significantly higher percentage, as we discussed last quarter. Sales to users in Construction Industries rose by 20%, led by North America. Residential construction continued to be strong in North America and the EAME. Non-residential construction in North America is recovering well as well.
Latin America showed very good growth in sales to users of a low base. Asia Pacific was lower due to a modest decline in China. As Jim mentioned, the Chinese market started to recover earlier in 2020 than other countries, leading to a tougher comparative. Overall, we still expect China to have another strong year with the industry in the above 10-ton excavator market about flat, retaining last year's large gain.
Sales to users in Resource Industries increased by 21%, reflecting growth in heavy construction and quarry and aggregates. Demand for equipment in mining also improved this quarter. And as Jim mentioned, we remain encouraged about the upside potential in mining.
In Energy & Transportation, sales to users rose by 1% in positive territory despite the fact that E&T sales to users were impacted to a lesser extent than other segments in the second quarter of last year due to the timing of large deals.
Now turning to Slide 10. Operating profit increased to $1.8 billion. The 128% improvement reflects higher volume in our three primary segments, favorable price and higher profits from financial products. That was partly offset by the impact of restoring short-term incentive compensation.
The assumption for short-term incentive compensation in the quarter was also raised by about $100 million compared to the first quarter to reflect our strengthening results. We now expect our full-year charge to be about $1.5 billion. This quarter, we had $25 million in restructuring expense, over $100 million lower than a year ago. We now expect around $250 million of restructuring expenses this year. We also had a full quarter impact of SPM Oil & Gas, including some M&A-related costs, which I'll cover in a bit more detail when we discuss Energy & Transportation.
The adjusted operating profit margin rose 480 basis points to 14.1%. As we expected, research and development and selling, general and administrative expenses rose. These increases reflected not only the impact of incentive compensation, but also investments in key priorities such as growing services and investing in product development to help our customers achieve their climate objectives.
As we explained in April, we did expect a sequential decline in margins versus the first quarter. Margins were broadly in line with our expectation. As we said, price realization turned positive in the quarter, while material and freight costs were negative. We did see a lower margin reduction than expected from absorption as production rates remained strong. However, the increase in short-term incentive compensation more than offset that.
The global tax rate remains about 26%. Adjusted profit per share of $2.60 excludes $0.04 of restructuring expense versus $0.24 restructuring expense as well as $0.19 for the settlements of pension obligations that occurred in the second quarter of last year.
Moving to Slide 11. Let's take a look at segment performance, starting with Construction Industries. Sales increased by 40% to $5.7 billion, primarily driven by higher sales volume and favorable price realization. The improvement in volume was due to high end user demand and the impact from changes in dealer inventories. As I mentioned earlier, the increase in end user demand was led by North America, where residential construction remained strong and non-residential construction strengthened. Overall, dealers reduced their construction equipment inventories less in the second quarter of 2021 than in the second quarter of 2020.
The segment's second quarter profit increased by 98% to $1 billion. The near doubling came from higher sales volume and favorable price realization, including geographic mix. Cost absorption and efficiencies were positive in the quarter. That was partly offset by two items, the impact of short-term incentive compensation and we started to see the impact of unfavorable raw material costs, although this was modest in the quarter. The segment operating margin increased by 530 basis points to 18.1%.
Turning to Slide 12. Resource Industries sales increased by 41% in the second quarter to $2.6 billion. The increase was mostly due to higher end user demand for equipment and aftermarket parts and changes in dealer inventories. As we expected, heavy construction and quarry and aggregates began to improve and we expect continued improvement from here. End user demand in mining also continued to improve.
Sales were up in all regions. Second quarter profit from Resource Industries more than doubled, increasing by 138% to $361 million. The increase was mainly due to higher sales volume, partially offset by the impact of our short-term incentive compensation expense. Price was slightly negative, mostly due to changes in prices for Australian dollar-denominated aftermarket parts. These were reduced to reflect currency movements versus US dollar. The operating margin increased by 570 basis points to 14%.
Now on Slide 13. Energy & Transportation sales increased by 20% to $5 billion. That included an 11% sales increase in oil and gas, largely due to higher sales of reciprocating engine aftermarket parts, driven in part by the addition of SPM Oil & Gas. Power generation sales improved by 18%, reflecting increased sales for large reciprocating engine applications, primarily to data centers. Industrial sales increased by 33% with demand across all regions. Transportation rose by 10% on higher rail services and ring sales.
Profit for E&T increased by 17% to $731 million. The improvement was due to the higher sales volume. That was partially offset by couple of factors, including the impact of short-term incentive compensation and acquisition-related expenses, primarily for SPM Oil & Gas. Higher freight costs were offset by manufacturing efficiencies. The segment's operating margin declined by 30 basis points to 14.7%.
With regards to SPM Oil & Gas, we do expect this to be a modest drag on margins for E&T for the remainder of the year. This was the first full quarter since the acquisition and it will take some time for the synergies to be realized. We're very pleased with the acquisition and expect to see the full benefits of the acquisition as we move forward.
On Slide 14, Financial Products revenue increased by 1% to $774 million as the portfolio remained relatively constant. Segment profit remained strong, increasing by 64% year-over-year to $243 million, which was about flat compared to the first quarter of 2021. The year-over-year profit increase was due to a lower provision for credit losses at CAT Financial compared to the year-ago quarter, which reflected the absence of forecasted COVID-19-related impacts.
In addition, we had a high net yield and average earning assets due to a favorable change in weighted average interest rates and a favorable impact from returned or repossessed equipment, benefiting from higher demand for used equipment. Our credit portfolio remains in good shape with indicators of customer health all positive. Postures [Phonetic] continue to improve to 2.58%, down 116 basis points year-on-year and down 32 basis points compared to the first quarter.
Credit applications remained strong as well, up 5% compared to the second quarter of 2020 and up 9% compared to the first quarter. New business volume continues to trend up, led by North America. Requests for loan modifications have returned to historical trends.
Moving to Slide 15. We're confident that in 2021, we'll achieve our Investor Day target for ME&T free cash flow of $4 billion to $8 billion. ME&T free cash flow was $1.7 billion in the second quarter compared to $500 million last year. The increase in ME&T free cash flow reflected higher profit, offset in part by a $500 million sequential increase in Caterpillar inventory in the second quarter of 2021. The inventory increase is primarily in components and work-in-process inventory and reflects strengthening end user demand and our response through supply chain challenges.
ME&T free cash flow has been $3.4 billion year-to-date, benefiting from higher profits as well as the absence of paying short-term incentive compensation in the first quarter. We continue to maintain a solid liquidity position and supports our strong mid-A credit rating. The company ended the period with $10.8 billion of enterprise cash.
We've said that we intend to return substantially all of our ME&T free cash flow to shareholders through the cycles. We've said that we'll do it through a combination of dividends and share repurchases, reserving our balance sheet to fund additional growth initiatives and mergers and acquisitions. In the past three years, we've returned on average 106% of our ME&T free cash flow to shareholders. This quarter, we announced we'll increase our quarterly dividend by 8% to $1.11 per share, which is about $600 million for the quarter. I'm happy to say we expect to extend our status as a dividend aristocrat for another year.
We repurchased about $250 million of our common shares this quarter. We have about $4.6 billion remaining under the current share repurchase authorization. We expect to continue to repurchase shares in the second half and intend to at least offset absolute dilution from shares issued during the year.
As Jim mentioned, there's no change to our current practice relating to guidance. However, as we've been doing, we are providing color on the upcoming quarter to give you a sense of what we're expecting to happen.
Moving to Slide 16. Again, we expect to achieve our Investor Day targets for adjusted operating profit margins in 2021, despite reinstating the short-term incentive compensation program. That's now projected to be a headwind of $1.5 billion for the year or about 300 basis points of pressure on margins. We expect stronger sales and normal seasonality would imply. The growth rate in sales to users should continue to accelerate in the third quarter when compared to the prior year and should be significantly higher than the 15% rate we saw in the current quarter.
In Construction Industries, we expect improvement in residential and non-residential construction demand to continue. As we discussed last quarter, we see tougher comparisons in China. Resource Industries end user demand should see support from both mining and heavy construction and quarry and aggregates. We also expect Energy & Transportation sales to increase on stronger underlying demand. All of this is expected to lead to good volume growth in the third quarter, even while we manage supply chain challenges.
As we told you last quarter and as Jim mentioned today, whilst dealers are independent businesses and make their own decisions about their inventory, we don't expect a significant benefit from restocking in 2021.
Third quarter margins are expected to be stronger than the prior year with leverage from strong volume more than offsetting the impact of reinstating short-term incentive compensation. However, we anticipate third quarter margins to moderate versus second quarter as we see some cost headwinds in the second half of the year.
Within machines, we currently expect price to offset higher manufacturing costs in 2021. In the second quarter, price was strongly positive reflecting strong geographic mix benefits and higher price realization. We did put through price increases for machines at the end of the second quarter, which will be positive, but geographic mix will be less of a benefit. Although we did take pricing actions, we do expect higher manufacturing costs, which means that our gross margin percentage will be moderately lower in the second half of the year versus the first half. We should also see accelerated spend in SG&A and R&D in the back half of the year as business gets back to normal.
Specifically, within Energy & Transportation, we expect some margin headwinds in the second half of the year. As E&T is a lumpy business with very margin structures across its applications, we expect variability in both price and mix, particularly as larger deals are recognized into revenue. In addition, as many of the E&T applications are expecting -- experiencing different levels of demand, we did not put through additional price increases in the second half -- second quarter. So this means material and freight cost increases will be a headwind for that segment.
In summary on Slide 17, demand continued to strengthen in the quarter, leading to strong volume growth. Adjusted operating profit margins improved by 480 basis points, driven by higher volumes, which more than offset the nearly 300 basis headwind of short-term incentive compensation and the small headwinds of supply chain disruption and material cost inflation. Adjusted profit per share more than doubled in the quarter. We are confident in the outlook for our end markets and expect to achieve our Investor Day margin and free cash flow targets.
And with that, we'll take your questions.
