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 5.
As Mike mentioned, we are seeing significant traction from the actions we are taking to strengthen the business. Through our focus on customers, effective adjustment of production, benefits from efficiency and productivity initiatives, ongoing proactive spending discipline and the relentless focus on managing inventory, we were able to deliver solid adjusted third quarter results, including sales of $8 billion at the high end of our guidance range of $7.9 billion to $8 billion. Operating margins of 23.2%, an increase of 160 basis points year-on-year and 390 basis points sequentially.
Earnings per share of $2.68, a year-on-year increase of 3% and free cash flow of $1.9 billion, up 39% year-on-year with conversion of 130%. Organic sales on an adjusted basis declined 3.1% versus last year. This included an expected year-on-year headwind of approximately $140 million, or 1.7 percentage points related to lower disposable respirator demand and last year's exit of our operations in Russia.
Excluding this, Q3 adjusted organic sales were down 1.4%. Consumer and electronics end markets continue to be soft. Our adjusted organic sales declined year-on-year mid-single digits in our electronics business and high single digits in consumer. This softness was partially offset by strength in our automotive OEM business.
Regionally, the U.S. was up slightly despite continued challenges in retail. Europe remains soft, and China was down mid-teens year-on-year organically due to continued end market softness along with lapping strong sales backlog recovery in the prior year. Our strong adjusted EPS of $2.68, exceeded our expectations of $2.25 to $2.40.
Roughly two-thirds of the beat was driven by operational execution in our supply chain and proactive spending discipline, and the balance driven by restructuring timing. The restructuring actions we announced earlier this year are largely on track, and we are seeing favorable margin impact in our results. We continue to expect full year pretax restructuring benefits of $400 million to $450 million with offsetting charges.
Turning to Slide 6 for the components that drove our year-on-year operating margin and earnings performance. Manufacturing productivity and restructuring actions, strong spending discipline and selling prices, partially offset by lower sales volumes, investments in the business and the previously mentioned headwinds from disposable respirator and last year's exit of Russia resulted an improvement to operating margins of 260 basis points and to earnings of $0.22 per share.
Pretax restructuring and related charges in the quarter were $68 million or a negative impact to margins of 80 basis points and $0.10 to earnings. This charge was lower than our anticipated range of $125 million to $175 million in Q3 due to factors that impacted the timing of actions that are being pushed into Q4.
The carryover impact of higher raw material logistics and energy cost inflation created a year-on-year headwind of approximately $25 million or a negative 30 basis points impact to operating margins and $0.03 to earnings. Foreign currency translation was a positive 0.6% impact to total adjusted sales. This resulted in a $0.01 tailwind to earnings per share. Last year's food safety divestiture and the reconsolidation of Aearo Technologies resulted in a net year-on-year tailwind of 10 basis points to margins and no impact to earnings.
Finally, other financial items decreased earnings by a net $0.02 per share year-on-year. In summary, our team's focus on driving productivity, executing restructuring actions and controlling spending continues to yield results. These actions drove meaningful year-on-year and sequential improvement in adjusted operating margins. Please turn to Slide 7.
Third quarter adjusted free cash flow was $1.9 billion, up 39% year-on-year with a conversion of 130%, up 360 basis points versus last year's Q3. This year-on-year improvement was driven by our ongoing focus on working capital management, especially inventory. Inventory was down over $200 million sequentially and $550 million year-on-year as we benefit from the power of daily management and data and data analytics to speed up inventory terms.
As always, there is more we can do and will do to continue to realize benefits from our actions as we move forward. Adjusted capital expenditures were $367 million in the quarter, as we continue to invest in growth, productivity and sustainability. During the quarter, we returned $828 million to shareholders via dividends. Net debt at the end of Q3 stood at $10.8 billion, a reduction of 11% year-on-year. Our business segments continue their long history of robust cash flow generation.
In addition, our proven access to capital markets, along with the anticipated onetime dividend from the spin of health care at leverage of 3x to 3.5x EBITDA and 19.9% retained stake will provide additional financial flexibility. 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 9 for our business group performance.
Starting with our Safety and Industrial business, which posted sales of $2.8 billion or down 5.8% organically. This result included a year-on-year headwind of approximately $130 million or 4.3 percentage points due to last year's COVID-related disposable respirator decline and exit of our operations in Russia. Excluding this, Q3 adjusted organic sales were down 1.5%. Personal safety was down high single digits due to last year's COVID-related disposable respirator comp. Excluding disposable respirators, personal safety was up high single digits organically. Closure and masking continued to be impacted by lower packaging and shipping activity and industrial adhesives and tapes by end market softness in electronics. Abrasives, electrical markets and automotive aftermarket declined versus last year's strong comparisons.
And finally, organic growth in our roofing granules business was up high single digits. Adjusted operating income was $708 million or up 5% versus last year. Adjusted operating margins were 25.7%, up 250 basis points year-on-year and up 350 basis points sequentially. The year-on-year improvement in margins was mainly driven by ongoing productivity actions, restructuring benefits, strong spending discipline and price. Partially offsetting these benefits were headwinds from lower sales volume and restructuring costs.
Moving to Transportation and Electronics on Slide 10, which posted Q3 adjusted sales of $1.9 billion. Adjusted organic growth declined 1.8% year-on-year, largely due to expected weakness in electronics. Our electronics business experienced a year-on-year mid-single-digit decline in adjusted organic sales as semiconductor and data center end market demand continues to remain soft. We are starting to see signs of stabilization in consumer electronics end market. However, we are closely monitoring demand trends as we head into the upcoming holiday season.
Our auto OEM business had a strong quarter, increasing approximately 16% year-on-year versus a low single-digit global car and light truck build, as we continue to gain penetration on automotive platforms.
Turning to the rest of Transportation and Electronics. Commercial solutions and transportation safety both declined mid-single digits year-on-year, mainly driven by weakness in China, while Advanced Materials grew low single digits. Transportation and Electronics delivered $494 million in adjusted operating income, up 21% year-on-year. Adjusted operating margins were 26.3%, up 460 basis points year-on-year and up 650 basis points sequentially. The year-on-year improvement in margins was driven by productivity actions, restructuring benefits, strong spending discipline and price. Partially offsetting these benefits were headwinds from lower sales volumes and restructuring costs.
Looking at our health care business on Slide 11. Q3 sales were $2.1 billion, with organic growth up 2.4% versus last year. Organic sales in oral care were up high single digits year-on-year and medical solutions grew -- grew low single digits organically, including continued impact from lower post-COVID-related biopharma demand. Health Information Systems declined low single digits due to tighter hospital budgets. As procedure volumes continue to improve and hospital budgets stabilize, we are confident in the long-term outlook of this business.
Health Care's third quarter operating income was $460 million or up 2% year-on-year. Operating margins were 22.2%, up 50 basis points year-on-year and up sequentially 240 basis points. The year-on-year improvement in margins was driven by productivity actions, restructuring benefits strong spending discipline and price. These benefits were partially offset by restructuring costs.
Finally, on Slide 12. Our Consumer business posted third quarter sales of $1.3 billion. Organic sales declined 7.2% year-on-year as discretionary spending trends on hardline categories remains subdued. The back-to-school season was soft and rising interest rates continue to impact the housing market and related spending. Consumers third quarter operating income was $269 million, down 10% compared to last year with operating margins of 20.5%, down 70 basis points year-on-year, however, were up 230 basis points sequentially. The year-on-year decline in margins was driven by headwinds from lower sales volumes and restructuring costs. These headwinds were partially offset by benefits from productivity actions, restructuring and strong spending discipline and price.
That concludes our remarks on the third quarter. Please turn to Slide 14 for an update on our full year's expectations.
Our strong third quarter performance shows the results of the significant actions we have put in place this year to generate better productivity yield and efficiency from our supply chain, drive simplification, manage costs and deliver for our customers in an uncertain macro environment. As a result, we are raising our full year 2023 adjusted earnings per share and free cash flow conversion guidance.
We now expect full year adjusted earnings in the range of $8.95 to $9.15 versus our prior range of $8.60 to $9.10. We are also updating our full year adjusted free cash flow conversion to be in a forecasted range of 100% to 110% versus 90% to 100% previously. Based on our year-to-date performance, we expect full year adjusted organic growth to be down approximately 3% versus our prior guidance to be at the lower end of flat to minus 3%.
This updated expectation includes an incremental headwind of $50 million from continued softness in disposable respirator demand. We now estimate a full year sales decline for disposable respirators of approximately $600 million versus $550 million previously. Looking ahead to the implied fourth quarter, we expect end market trends to be consistent with Q3.
Hence, we anticipate fourth quarter adjusted sales to be in the range of $7.6 billion to $7.7 billion, taking into consideration normal seasonality with fewer sales days due to holidays. Fourth quarter pretax restructuring charges are expected to be in the range of $70 million to $120 million, incorporating the timing impact I mentioned earlier, with pretax benefits of $145 million to $195 million. Taken together, we expect fourth quarter adjusted earnings per share will be in the range of $2.13 to $2.33.
To wrap up, we are very focused on our priorities by driving improved performance through strong operational execution, progressing on our restructuring actions and spending discipline successfully spinning off health care and reducing risk by managing litigation exposures.
At the same time, we are positioning 3M for the future as we prioritize the most attractive markets, invest to support continued innovation and capitalize on emerging opportunities. We expect our actions will continue to build momentum and drive long-term improvement in our organic growth margins and cash flow performance into the future.
As we exit 2023, we will be a stronger, leaner and a more focused 3M, and I remain confident in our future. Our solid third quarter is a direct result of the hard work of 3M employees. I want to thank them for their dedication and focus as they continue to deliver in partnership with our suppliers for customers and shareholders. That concludes my remarks. We will now take your questions.
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