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Why 3M’s Industrial Segment’s Operating Margin Fell in 4Q17

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Feb. 5 2018, Updated 12:35 p.m. ET

Performance of 3M’s Industrial segment in 4Q17

3M’s (MMM) Industrial segment is the company’s largest revenue contributor with a revenue share of 34.0% in 4Q17. The segment’s revenue share has dropped 0.7 percentage points over 4Q16. The segment reported revenue of $2.7 billion in 4Q17, an increase of 6.9% on a year-over-year basis. In 4Q16, this segment reported revenue of $2.5 billion.

The segment witnessed organic growth of 3.9% driven by the positive growth in the businesses of abrasives, automotive and aerospace, industrial adhesives & tapes, automotive aftermarket and separation, and purification sciences. However, the advanced materials business saw a decline in revenue. The other important factor that contributed to the segment’s revenue growth was the strong gains in foreign currencies that pushed the revenues by 3.0%.

Geographically, Asia-Pacific led growth with a rise of 8.0%, followed by EMEA (Europe, the Middle East, and Africa) with growth of 6.0%, Latin America/Canada at 5%, and the United States at 1.0%.

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Industrial segment’s operating income and margin

The Industrial segment reported operating income of $527 million in 4Q17 compared to $558.0 million in 4Q16, a decrease of 5.5% year-over-year. The segment reported an operating profit margin of 19.4% in 4Q17 compared to 21.9% in 4Q16, a fall of 250 basis points year-over-year. The margin fell primarily due to the absence of the gain on sale. In 4Q16, 3M recorded a gain on sale of its temporary protective films business.

Outlook for the Industrial segment

The Industrial segment revenue is expected to continue its upward trend through organic growth. Weakness in the US dollar could remain favorable for 3M. Geographically, Asia-Pacific is expected to continue to lead the growth.

Investors looking to invest in 3M indirectly can invest in the iShares MSCI USA ESG Select ETF (KLD), which has invested 4.9% of its portfolio in 3M. The fund’s other holdings include Microsoft (MSFT), Apple (AAPL), and Caterpillar (CAT) with weights of 5.0%, 3.8%, and 1.7%, respectively, as of January 26, 2018.

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