Andrew R. J. Bonfield
Chief Financial Officer at Caterpillar
Thank you, Jim, and good morning, everyone. I'll begin with a recap of our first quarter results, including the performance of our segments. Then I'll comment on the balance sheet and free cash flow before concluding with a few comments on our expectations as we move into the second quarter of 2022.
Beginning on Slide eight, sales and revenues for the first quarter increased by 14% or $1.7 billion to $13.6 billion. Volume, including higher dealer inventory build and price, drove the increase in sales and revenues, which, as Jim mentioned, was slightly better than we had expected. Operating profit increased by 2% to $1.9 billion as price realization and volume growth were partially offset by higher manufacturing and period costs.
Our adjusted operating profit margin of 13.7% was slightly better than we had anticipated primarily due to the stronger-than-expected volumes and favorable price realization. First quarter profit per share was $2.86 compared to $2.77 in the prior year. Adjusted profit per share was $2.88 in the first quarter compared to $2.87 last year. Adjusted profit per share for both quarters excludes restructuring costs.
Our global tax rate in the quarter was about 24%, slightly lower than we had guided you in January. However, on a comparable basis, the lower tax rate was offset by lower favorable discrete tax benefits compared to the prior year.
Now on Slide nine. As we anticipated, the top line improved on stronger volume and price realization. End-user demand increased versus the prior year but the growth rate accelerated on a sequential basis due to tougher comparisons, especially in China. Dealer inventory rose by about $1.3 billion. Services revenues remained strong in the quarter. Price realization strengthened, while currency was a bit of a headwind.
Let me provide some color on dealer inventory. The $1.3 billion increase versus year-end 2021 was nearly double what we had anticipated and about $600 million more than the increase we saw in the same quarter last year. About half of that $600 million increase year-on-year came from Resource Industries due to the timing of shipments from our dealers to their customers, which can be lumpy. These units are backed by firm customer orders but were not recognized in our reported retail sales for the quarter. This is in part due to variations in on-site assembly times. The other half of the deal inventory increase was mainly due to the timing of shipments in Construction Industries late in the quarter.
We anticipate that dealers will start to sell down the inventories in the second quarter following their normal seasonable pattern on strong sales to users. Our expectations for the full year haven't changed, and we do not expect to see a significant benefit from dealer restocking in 2022 as end-user demand remains strong.
First quarter sales and revenues increased by double-digit percentages in all regions except Asia Pacific. Sales in North America rose by 23% with continued growth in the three primary segments. In EAME, sales increased by 15%, while Latin America sales grew by 26%. A 4% decrease in Asia Pacific sales was primarily due to softening in China. Sales in the remainder of that region were positive.
Moving to Slide 10. As I mentioned, first quarter operating profit increased by 2% on favorable price and volume. Price realization was slightly better than we had anticipated. Manufacturing costs remain elevated but in line with our expectations primarily due to continued material and freight cost headwinds. SG&A and R&D costs increased partly due to investments in services and technologies such as digital, autonomy and electrification.
Our first quarter adjusted operating profit margin was 13.7%, a 210 basis point decrease versus the prior year. As we said in our fourth quarter 2021 earnings call, we expected the largest margin headwinds to occur in the first quarter. First quarter margins were lower than the prior year. Favorable price realization did not offset higher manufacturing costs but did improve compared to the fourth quarter of 2021. Margins were slightly better than we had anticipated on stronger price and volume partially offset by higher-than-expected short-term incentive compensation. I will discuss our expectations for the second quarter and full year margins in a bit more detail later.
Moving to Slide 11. Let's review segment performance starting with Construction Industries. Sales increased by 12% in the first quarter to $6.1 billion primarily driven by favorable price realization and strong sales volume. End-user demand improved in three of the four regions. North America had the highest sales growth in sales dollars, a 28% increase, as nonresidential demand improved and residential construction remains strong. Sales in Latin America increased by 60% as construction activity supported higher demand. EAME sales increased by 18% primarily due to growth in residential construction demand. However, Asia Pacific sales decreased by 21% due to a reduction in sales in China, which had a very strong quarter a year ago.
The segment's first quarter profit increased by 1% versus the prior year to $1.1 billion. Price realization and higher sales volume drove the increase more than offsetting increases in manufacturing costs. Price realization was stronger than we had anticipated but lagged manufacturing costs in the quarter. The segment's operating margin decreased by 180 basis points to 17.3%.
Turning to Slide 12. Resource Industries sales increased by 30% in the first quarter to $2.8 billion. The improvement was mostly due to higher end-user demand, the impact from changes in dealer inventories and favorable price. End-user demand increased in heavy construction and quarrying aggregates as well as mining.
First quarter profit for Resource Industries increased by 16% to $361 million. Higher sales volume and favorable price realization were partially offset by higher manufacturing costs and increases in SG&A and R&D expenses. Manufacturing cost increases were primarily due to freight and material. The segment's operating margin decreased by 150 basis points versus last year to 12.8%.
Now on Slide 13. Energy & Transportation sales increased by 12% to approximately $5 billion with sales up across all applications. This included a 4% sales increase in oil and gas, including aftermarket parts for reciprocating engines. Power generation sales increased by 5%. Small reciprocating engine sales improved. Solar turbine sales were lower in the quarter for oil and gas and power generation applications, impacted by a higher-than-usual first quarter in 2021. Industrial sales rose by 25%, with strength across all regions. Finally, transportation increased by 9% on reciprocating engine cells for both aftermarket parts and marine applications.
Profit for Energy & Transportation decreased by 20% to $538 million. Higher sales volume and price realization were more than offset by higher manufacturing costs, reflecting continued headwinds from freighter material. In addition, SG&A and R&D expenses increased. The segment's operating margin decreased by 430 basis points versus last year to 10.7%.
Let me take a moment to provide a bit more color on Energy & Transportation margins. Seasonally, first quarter margins are typically lower compared to the rest of the year in this segment. However, the first quarter of 2022 proved a bit more challenging due to continued supply chain constraints, including elevated freight and material costs.
I'll discuss very generally, but note that increased freight costs have impacted this segment more than others. Also, Energy & Transportation took price increases later in the year 2021 given the different marketing dynamics as compared to the other primary segments. However, similar to the other segments, we expect margins to improve through 2022 as the benefit of higher price realization starts to pull through.
Moving to Slide 14. Financial Products had another good quarter. Revenue increased by 3% to $783 million. Segment profit decreased by 2% to $238 million. Whilst profit was down, this represents our second highest first quarter profit in eight years. The decrease was mainly due to a higher provision for credit losses at Cat Financial related to reserves associated with Russia and Ukraine.
Note, the Russian-Ukraine generally accounts for about 2% of Caterpillar's enterprise sales and less than 1% of the Cat Financial portfolio. Demand for used equipment remained very strong in the quarter, and that helped mitigate the impact of higher provisions.
Moving to our credit portfolio. It remains high quality as customers and dealers continue to perform well in the quarter. Past dues were 2.05%, the best first quarter performance we've seen in 15 years. That's down 85 basis points year-over-year and up just 10 basis points compared to the fourth quarter, which had marked a 15-year low. While new business volume typically decreased versus the fourth quarter, this is typical seasonality. New business volume was our second highest first quarter performance in 8 years, second only to the prior year, which benefited from pent-up demand following COVID-related shutdowns. Regarding interest rate changes, we are in a good position as our matched funding strategy serves to mitigate that risk. We also maintained healthy spreads on new business.
Now on Slide 15. We had an ME&T free cash outflow of about $400 million, a decrease of $2.1 billion versus the first quarter of 2021. Let me take a moment to discuss the changes. In a typical year, the first quarter is our weakest from a cash generation perspective, primarily due to the payment of our incentives. We paid approximately $1.3 billion in short-term incentive compensation during the first quarter compared to 0 in the prior year. This accounts for the majority of the difference year-over-year. In addition, we continue to build production inventory in the quarter by about $1 billion, which contributed to a negative net working capital impact of approximately $600 million. Despite these first quarter impacts, we continue to expect to achieve our Investor Day free cash flow target of between $4 billion and $8 billion for the full year.
Moving to shareholder return. We paid around $600 million in dividends during the first quarter. We also repurchased about $800 million worth of common stock supporting our objective to be in the market on a more consistent basis. Enterprise cash was $6.5 billion, a $2.7 billion decrease compared to the year-end. The $400 million free cash outflow and the $1.4 billion in shareholder returns accounted for the majority of the decrease in our cash position. In addition, we have moved some of our cash balances into slightly longer-dated liquid marketable securities in order to improve the yield on that cash. This amounted to about $800 million in the quarter.
Now on Slide 16. In light of the current environment, including supply chain constraints, we continue to refrain from providing annual profit per share guidance. However, I do want to share some thoughts on the second quarter and the full year. The first quarter played out slightly better than we had anticipated on the top line, resulting from higher volume and better-than-expected price tailwinds. Supply chain challenges remained steady, which we expect to continue into the second quarter. Despite these challenges, we anticipate the top line will increase compared to the first quarter and continued strong end user demand and favorable price realization.
Looking to the remainder of the year, our order books and backlog remain robust. We expect continued strong end-user demand and pricing, although supply chain challenges will impact the extent to which we'll be able to fully meet demand. As I mentioned, we do not expect to see a significant benefit from dealer restocking in 2022.
On margins, as we discussed in January, we do not expect a typical year. In a normal year, we'd see strong margins in the first quarter with margins decreasing sequentially through the fourth quarter. However, this year, we expect margins to improve in the second half of the year compared to both the first half and the comparable period of 2021 as the impact of price actions accelerate. Comparisons ease in the back half of the year as well as we let the manufacturing cost increases from the prior year. As Jim mentioned, we continue to expect price to more than offset manufacturing costs for the full year. Specific to the second quarter, we expect similar margins to the prior year as additional price actions should offset manufacturing cost increases.
Looking at the second quarter by segment. We do expect margins in both Construction Industries and Resource Industries to be close to or higher than the prior year as price improves and manufacturing cost headwinds are in line with the first quarter. Margin in Energy & Transportation still lag the prior year as the timing of price actions is late as compared to the other segments. However, we expect the lag in the second quarter was not -- will not be as significant as it was in the first quarter.
As we move into the second half of the year in Energy & Transportation, we expect a reduction in expediting costs and an improvement in efficiencies. Increases in large engine and turbine volumes versus 2021 should also positively contribute to margins in the second half of the year. However, it's important to note that the majority of our core investments related to the energy transition will impact this segment.
Finally, to assist with more modeling, we currently expect to add accrual for short-term incentive compensation expense to be around $1.3 billion this year. We anticipate a global effective tax rate of around 24% and restructuring costs of approximately $600 million for the full year.
Turning to Slide 17. In summary, we performed well in a challenging environment. End-user demand remains strong, and we realized $1.7 billion more in revenues. Sales and margins were slightly better than we expected. Looking ahead, comparisons ease in the second half of the year, and we expect to achieve our Investor Day targets of adjusted operating profit margins and ME&T free cash flow. And with that, we'll take your questions.
