Monish Patolawala
President and Chief Financial Officer at 3M
Thank you, Mike, and I wish you all a very good morning. Please turn to slide 6. The fourth quarter culminated a year where we took significant steps to improve our operational execution, resulting in better financial performance. We aggressively controlled spending and initiated restructuring actions to simplify our supply chains, reduce structure, and streamline our go-to-market models to better serve customers. At the same time, we continued preparing for the successful spin of our Health Care business and worked to reduce risks and uncertainties related to legal matters. While there is more to do, our teams made tremendous progress in 2023 that we build upon in 2024 and beyond.
Looking at fourth quarter performance, adjusted sales were $7.7 billion, at the high end of our guidance. End markets continued to play out as anticipated. Notably, the auto OEM market remained strong in the fourth quarter, and we saw signs of end market stabilization in consumer electronics. As expected, China and consumer retail end markets continued to be soft. Organic sales on an adjusted basis declined 1.4% versus last year. The expected decline in demand for disposable respirators negatively impacted organic growth by 60 basis points or $50 million. Excluding this impact, Q4 adjusted organic sales were down 80 basis points. Adjusted operating margins were 20.9%, up 180 basis points year-on-year, or up 320 basis points excluding the impact of restructuring charges. Adjusted earnings were $2.42, up 11% year-on-year. Versus our guidance, fourth quarter earnings were benefited by $0.06 due to a lower-than-expected tax rate, which was partially offset by the acceleration of restructuring actions, which impacted earnings by approximately $0.03. And finally, fourth quarter adjusted free cash flow was $2 billion, up 18% year-on-year. For the full year, we delivered $6.3 billion in adjusted free cash flow versus an originally expected range of $4.2 billion to $5 billion at the start of the year.
Please turn to slide 7 for a recap of the components that drove our year-on-year operating margin and earnings performance. Benefits from manufacturing productivity, sourcing actions, restructuring, strong spending discipline, and selling prices more than offset headwinds from lower sales volumes, investments in the business, and last year's disposable respirator sales comparison. This net benefit drove a year-on-year expansion in Q4 operating margins of 400 basis points and earnings per share of $0.43 per share. Pretax restructuring and related charges in the quarter were $109 million, or a negative impact to margins of 140 basis points and $0.17 to earnings. Raw material, logistics, and energy cost inflation was a slight year-on-year headwind of 10 basis points to operating margins, or minus $0.01 adjusted earnings per share. Foreign currency translation was a negative 70 basis points impact to adjusted operating margins, or negative $0.07 per share. This result was primarily due to the net impact of hedging and the devaluation of the Argentinian peso. As previously mentioned, our adjusted tax rate was lower than expected coming in at 14.9%. This compared to 16.6% in last year's fourth quarter, resulting in a $0.05 benefit to earnings. And finally, other financial items and shares outstanding netted to a positive $0.01 per share year-on-year impact.
Please turn to slide 8. Fourth quarter adjusted free cash flow was $2 billion, up 18% year-on-year with conversion of 145%, up 800 basis points versus last year's Q4. Our ongoing focus on working capital management, especially inventory, continues to yield results. Inventory was down $550 million year-on-year and is now at 14.8% of sales, a 90 basis points improvement year-on-year. I am pleased with the progress to date and see significant opportunity to further improve performance in all aspects of working capital. Adjusted capital expenditures were $308 million, down 32% versus last year's abnormally high fourth quarter. For the year, we invested over $1.4 billion versus an expected range of $1.3 billion to $1.5 billion. And finally, we returned $828 million to shareholders via dividends during the quarter.
Turning to the balance sheet. Net debt at the end of Q4 stood at $10 billion, a decline of $2 billion year-on-year, or 17%. 3M continues to be a reliable and robust cash generator. In addition, the upcoming spin of our Health Care business will further strengthen our balance sheet. As Bruce mentioned, we anticipate receiving a one-time dividend from Solventum at an initial leverage of 3 to 3.5 times EBITDA. We will also retain a 19.9% equity stake, which will provide additional liquidity. This, combined with our existing strong capital structure, provides us with the ability to continue to invest in the business, return capital to shareholders, and meet the cash flow needs related to ongoing legal matters.
Now please turn to slide 10 for a discussion on our business group performance. Starting with our Safety and Industrial business, which posted sales of $2.7 billion, down 3.9% organically. The expected decline in demand for disposable respirators was a headwind of approximately $50 million, negatively impacting segment organic growth by 160 basis points. Organic growth was led by a double-digit increase in roofing granules, while industrial adhesives and tapes was flat, while all other businesses declined. Geographically, core industrial markets in the United States were relatively strong while China remained weak. Our businesses were impacted by reduction in channel inventory towards the end of the quarter, particularly in the greater China and EMEA regions, as channel partners manage cash and are cautious as we enter 2024. Adjusted operating income was $524 million, down 6% versus last year. Adjusted operating margins were 19.7%, down 70 basis points year-on-year. This decline was driven by lower sales volumes, which was partially offset by benefits from restructuring, pricing, and strong spending discipline.
Moving to Transportation and Electronics, which posted sales of $1.8 billion, up 2.7% organically. Our auto OEM business continued to perform well and increased 13% versus a 9% increase in global car and light truck builds. The Electronics business remained flat organically year-on-year as demand for consumer electronic devices began to stabilize, while the semiconductor remained soft. We continue to closely monitor these trends and are well-positioned to grow with our customers in these large and important end-markets. Looking at the rest of Transportation and Electronics, advanced materials grew organically high-single-digits, commercial solutions grew low-single-digits, and transportation safety declined low-single-digits. Transportation and Electronics delivered $370 million in adjusted operating income, up 28% year-on-year. Adjusted operating margins were 20.9%, up 380 basis points versus Q4 last year. The team achieved this result through restructuring actions, pricing, and strong spending discipline.
Turning to our Health Care business. Q4 sales were $2 billion, or down 1% organically versus last year. Sales in our medical solutions business grew low-single-digits organically, while separation and purification and oral care were both down low-single-digits. Health information systems' organic sales decreased high-single-digits. Looking at the year, our businesses within Health Care continued to see lingering COVID-related impacts. Full-year organic growth in Health Care was approximately 1% with both medical solutions and oral care posting positive low-single-digit growth while health information systems and separation and purification were both down low-single-digits.
Health Care's fourth quarter operating income was $372 million, down 10% year-on-year. Operating margins were 18.3%, or down 1.9 percentage points, with adjusted EBITDA margins of 26%. Year-on-year adjusted operating margins were impacted by lower sales volumes, along with added costs associated with the pending spin. Lastly, the consumer business posted fourth-quarter sales of $1.2 billion. Organic sales declined 2.2% year-on-year. Home improvement increased low-single-digits organically, while home health and auto declined low-single-digits, and stationery and office declined high-single-digits. Geographically, organic growth was down slightly in the U.S., while EMEA was down mid-single-digits and Asia Pacific declined low-double-digits. Consumer's fourth quarter operating income was $221 million, up 4% compared to last year, with operating margins of 18%, up 100 basis points year-on-year. The improvement in operating margins was driven by benefits from restructuring actions, portfolio optimization, strong spending discipline, and productivity actions.
Before I turn it back to Mike for him to discuss outlook for 2024, I wanted to take a moment to reflect on our 2023 total company performance. As the year progressed, we made strong improvements in adjusted operating margins. For reference, slide 23 in the appendix provides our quarterly adjusted operating margin recons for the year. As you can see, we delivered significant improvement in performance, particularly when setting aside the impact from restructuring charges.
Please turn to slide 12, and I will now turn the call back over to Mike. Mike?
