Monish Patolawala
Executive Vice President, Chief Financial and Transformation Officer at 3M
Thanks, Mike, and I wish you all a very good morning. Please turn to Slide 5. Looking back on the fourth quarter, the 3M team continued to manage through a challenging environment. As Mike noted, revenues for December were better than previously expected across all the businesses, including disposable respirators as the Omicron variant increased near-term demand. Though manufacturing, raw materials and logistics challenges persisted throughout the quarter, the 3M team executed well by driving operating rigor and managing costs, while continuing to invest in the business.
Turning to the fourth quarter financial results. Sales were $8.6 billion, up 0.3% year-on-year or an increase of 1.3% on an organic local-currency basis against our toughest quarterly comparison last year. Operating income was $1.6 billion with operating margins of 18.8% and earnings per share of $2.31. On this slide, you can see the components that impacted our operating margins and earnings per share performance as compared to Q4 last year. The biggest impact to fourth quarter results was the ongoing effects from the well-known global supply chain, raw materials and logistics challenges which persisted throughout the fourth quarter.
Our enterprise operations teams continue to work tirelessly through ever-evolving changes in customer demand, while navigating these challenges to keep our factories running, serve our customers and protect the health and safety of our employees. We continue to experience significant productivity headwinds in our factories due to shorter production runs and more frequent production changeovers throughout the quarter as we focused on serving our customers. As forecasted at the start of last year, we also had higher year-on-year compensation and benefits costs. These impacts were partially offset through strong spending discipline along with benefits from restructuring and lower legal related expenses versus last year's Q4. We also continue to prioritize investments in growth, productivity and sustainability to drive long-term performance and capitalize on trends in large attractive markets, including automotive, home improvement, safety, health care, and electronics. All-in, these impacts lowered operating margins by 2.4 percentage points and earnings per share by $0.33 year-on-year.
Moving to price and raw materials. As expected, our selling price actions continued to gain traction as we went through the quarter. On a year-on-year perspective, Q4 selling prices increased 260 basis points as compared to 140 basis points in Q3 and 10 basis points in Q2. In dollar terms, higher year-on-year selling prices offset raw material and logistics cost inflation in Q4, which resulted in an increase in earnings of $0.03, however, remained a headwind of 20 basis points to operating margins.
Next, foreign currency net of hedging impacts was a headwind of 10 basis points to margins and $0.04 per share year-on-year. There were three other non-operating items that impacted our year-on-year earnings per share performance. First, a reduction in other expenses resulted in a $0.10 earnings benefit. This included a $0.06 benefit from non-operating pension, which was similar to prior quarters. We also have been proactively managing our debt portfolio, including the early redemption of $1.5 billion, which helped drive a $0.04 benefit year-on-year from lower net interest expense.
Second, a lower tax rate versus last year provided a $0.12 benefit to earnings per share. Our Q4 tax rate was benefited by geographic income mix and favorable adjustments related to impacts of U.S. international tax provisions. And for the full-year, our tax rate was 17.8%. And finally, average diluted shares outstanding decreased 1% versus Q4 last year, increasing per share earnings by $0.02.
Please turn to Slide 6 for a discussion of our cash flow and balance sheet. Fourth quarter adjusted free cash flow was $1.5 billion or down 30% year-on-year with conversion of 110%. For the full-year, adjusted free cash flow was $6 billion with adjusted free cash flow conversion of 101%. The decline in our Q4 year-on-year free cash flow performance was driven primarily by lower non-cash legal and restructuring expenses versus Q4 last year along with higher litigation related payments and capex investments, which is partially offset by improvements in working capital velocity. Fourth quarter capital expenditures were $556 million, up $134 million year-on-year and $213 million sequentially as we continue to invest in growth, productivity and sustainability.
Looking at the full-year, capital expenditures totaled $1.6 billion. During the quarter, we returned $1.8 billion to shareholders through the combination of cash dividends of $848 million and share repurchases of $938 million. For the full-year, we returned $5.6 billion to shareholders in the form of dividends and share repurchases. Our strong fourth quarter cash flow generation and disciplined capital allocation enabled us to continue to maintain a strong capital structure. We ended the year with $4.8 billion in cash and marketable securities on hand and reduced net debt by $1.2 billion or 8% versus year-end 2020. As a result, we exited the year with net debt to EBITDA of 1.4 times. Our strong balance sheet and cash flow generation capability along with disciplined capital allocation continues to provide us the financial flexibility to invest in our business, pursue strategic opportunities and return cash to shareholders while maintaining a strong capital structure.
Please turn to Slide 7, where I will summarize the business group performance for Q4. I will start with our Safety and Industrial business, which posted an organic sales decline of 1.3% year-on-year in the fourth quarter. This result included a disposable respirator sales decline of approximately $110 million year-on-year, which negatively impacted Safety and Industrial's Q4 organic growth by nearly four percentage points. Our personal safety business declined mid-teens organically versus last year's 40% pandemic-driven comparison. Looking ahead, we anticipate that COVID related disposable respirator demand will decline as we move through 2022. However, we remain prepared to respond to changes in demand as COVID related impacts continue to evolve.
Turning to the rest of Safety and Industrial. Organic growth was led by a double-digit increase in closure and masking. In addition, the abrasives business was up high single-digits, industrial adhesives and tapes and electrical markets were each up mid single-digits, automotive aftermarket was flat, while roofing granules declined against a strong comparison from last year. Safety and Industrial's fourth quarter operating income was $543 million, down 22% versus last year. Operating margins were 17.7%, down 440 basis points versus Q4 last year. Year-on-year operating margin performance was impacted by a decline in sales volumes, higher raw materials, logistics and litigation related costs, manufacturing productivity impacts along with last year's gain on sale of property. Partially offsetting these impacts were selling price increases, strong spending discipline, net benefits from restructuring and a smaller increase to our respirator mask reserve.
Moving to Transportation and Electronics, which declined slightly on an organic basis due to the continued impact of the semiconductor supply chain constraints. Our auto OEM business was down mid-teens organically year-on-year compared to the 13% decline in global car and light truck builds. As we mentioned last quarter, we experienced an increase in channel inventory levels with the tier suppliers in Q3, as auto OEM production volumes decelerated from $18.5 [Phonetic] million builds in Q2 to $16.3 [Phonetic] million in Q3.
During the fourth quarter, OEM production volumes increased to $20.2 [Phonetic] million builds or up over 20% sequentially. This sequential increase in build activity drove a reduction of channel inventory levels with the tier suppliers during the quarter, which negatively impacted Q4 organic growth for automotive business by approximately 10 percentage points. For the full-year, our auto OEM business was up low double-digits as compared to global car and light truck builds growth of 2%. Throughout the year, we continued our track record of success of winning with our customers and gaining penetration on new internal combustion and electric vehicle platforms.
Our electronics related business declined low single-digits organically with declines across consumer electronics, particularly smartphones and TVs. These declines were partially offset by continued strong demand for our products and solutions in semiconductor and factory automation end markets.
Turning to the rest of Transportation and Electronics. Commercial solutions grew low double-digits, advanced material was up high single-digits, while transportation safety declined high single-digits. Fourth quarter operating income was $406 million, down 15% year-on-year. Operating margins were 17.6%, down 270 basis points year-on-year. Operating margins were impacted by higher raw materials and logistics costs, manufacturing productivity impacts along with an increase in comp and benefits costs. These year-on-year headwinds were partially offset by increases in selling price, strong spending discipline and net benefits from restructuring actions.
Turning to our Health Care business, which posted a fourth quarter organic sales increase of 1.6%. This result included a nearly four percentage point drag from the year-on-year sales decline in disposable respirators. Our medical solutions business declined low single-digits organically, which included a six percentage point impact from the year-on-year sales decline in disposable respirators. Fourth quarter elective medical procedure volumes were approximately 90% of pre-COVID levels, which was similar to Q3 and last year's Q4. Sales in our oral care business grew low single-digits year-on-year as patient visits continued to be near pre-COVID levels. The separation and purification business increased high single-digits year-on-year with sustained demand for biopharma filtration solutions for COVID related vaccines and therapeutics.
Health information systems grew mid single-digits, driven by strong growth in revenue cycle management and clinician solutions. And finally, Food Safety increased high single-digits despite continued COVID related impacts of the global hospitality industry.
In December, we announced a planned separation of this business which will be combined with NEOGEN. As disclosed in the December press release, we expect the transaction to close by the end of Q3 of this year. Health Care's fourth quarter operating income was $536 million, down 2% year-on-year. Operating margins were 23.6%, down 50 basis points. Year-on-year operating margins were negatively impacted by raw materials and logistics costs, manufacturing productivity, compensation and benefits costs and food safety deal related cost. These impacts were partially offset by benefits from leverage on sales growth, strong spending discipline and restructuring actions.
For the quarter and full-year, Health Care's adjusted EBITDA margins were strong coming in at nearly 31%. Lastly, our Consumer business finished out the year strong with organic growth of 4.9% year-on-year on top of last year's 10% comparison. Our home improvement business continued to perform well, up low single-digits on top of last year's strong double-digit comp. This business continued to deliver strong growth with our home improvement retail customers in our category leading Filtrete, Command and ScotchBlue brands. Stationery and office along with the consumer health and safety business each grew low double-digits organically in Q4, as both of these businesses continue to lap last year's COVID related comparisons.
The holiday season demand drove strong growth for our Scotch branded products during the quarter. We also posted strong growth in posted branded products despite workplace reopenings being pushed out due to the resurgence of COVID cases. And finally, our home care business was up low single-digits versus last year's strong COVID driven comparison. During the quarter, we took a small portfolio action to divest our floor care business in Europe, which is expected to close in Q1. Consumer's operating income was $316 million flat compared to last year. Operating margins were 21.4%, down 100 basis points year-on-year. Operating margins were impacted by higher raw materials, logistics and outsourced hard-goods manufacturing costs, manufacturing productivity impacts along with increased compensation and benefit costs. These impacts were partially offset by leverage on sales growth, which included good price performance, strong spending discipline and net benefits from restructuring actions. That concludes my remarks for the fourth quarter.
Before I turn it back over to Mike to recap the year, I would like to make a few comments reflecting on our operating performance this past year. The macro environment in 2021 was defined by strong, but fluid end markets, semiconductor constraints, supply chain and logistics challenges along with ever-evolving impacts from COVID-19, particularly on the global healthcare industry. These dynamics were further compounded by Winter Storm Uri in mid-February, which led to significant disruptions to raw material supply and logistics availability, which further disrupted global supply chains. All of these factors collectively helped contribute to broad-based and accelerating inflationary pressures throughout the year.
Against this backdrop, the 3M team kept a relentless focus on serving customers, ensured continuity of raw material supply, managed ever-changing manufacturing production plans, navigated logistic constraints and delivered strong full-year organic growth of 9% with all business segments posting high single-digit growth. We also worked hard to raise selling prices, control spending and drive improvements in operating rigor through daily management, leveraging data and data analytics, while continuing to execute on our restructuring actions.
These actions combined with strong organic growth helped to deliver full-year operating margins of 20.8% or down 50 basis points year-on-year on an adjusted basis. This result included an 80 basis point headwind from raw materials and logistics inflation net of selling price actions, along with increased spending to advance our sustainability efforts and higher legal related expenses. In addition, we continue to focus on working capital improvement, which helped contribute to another year of robust adjusted free cash flow coming in at $6 billion.
I want to thank the 3M employees for delivering for our customers and shareholders in a very uncertain and fluid environment. I also want to take a moment to personally thank our customers and suppliers for putting their trust and confidence in us and for maintaining strong and close partnerships that helped us navigate the challenges of the past year. We made good progress in 2021 and are well positioned for 2022. And in the spirit of continuous improvement, there is always more we can do and will do.
With that, please turn to Slide 8, and I will turn it back over to Mike for his recap of 2021.