Illinois Tool Works Inc. (ITW) Earnings & Analysis

Latest quarter

Illinois Tool Works reported third-quarter revenue of $4.2 billion, below the $4.3 billion consensus. Adjusted earnings per share were $3.00, above the $2.99 consensus.

The company’s revenue rose from $4.1 billion a year earlier, while diluted EPS increased from $2.81. CFO Michael Larsen said organic growth came to 3.8%, with foreign exchange and an acquisition also contributing. He reported organic growth of 16% in Test & Measurement and Electronics and 7% in Welding, while Automotive OEM organic revenue fell 2% and Construction Products declined 1%.

ITW reported an operating margin of 27.8%, up from 27.4% a year earlier and above its quarterly guidance. Gross margin rose to 45.1% from 44.5%. Free cash flow was $847.0 million, compared with $897.0 million a year earlier.

Adjusted EPS is the figure the consensus estimates, not the GAAP EPS above.

What management said on the call

CEO Chris O’Herlihy said demand accelerated in the company’s capital-spending-related businesses, with orders growing faster than revenue in both Welding and Test & Measurement and Electronics. CFO Michael Larsen said semiconductor demand helped Test & Measurement grow, while electronics assembly and semiconductor-related businesses drove growth across the segment. He said ITW had continued investing in strategic growth initiatives in those businesses through the cycle.

O’Herlihy said a tornado damaged two welding facilities and reduced third-quarter revenue by about $40 million. He said operations had been restored and that, with welding order growth ahead of revenue, the company expected the business to return to growth in the fourth quarter. Larsen said business interruption insurance offset the operating income lost because of the tornado.

On pricing, Larsen said increases and other actions offset higher raw-material costs in the quarter, although employee-related inflation partly offset those benefits. He said Automotive OEM margins fell primarily because resin costs rose before the company recovered them through pricing. In response to a question about price-cost, Larsen said pricing actions largely came through as planned, but declined to quantify the quarterly margin impact in basis points because conditions remained dynamic.

Asked about backlog, Larsen said ITW had “a little bit more backlog than usual,” measured in months rather than years. O’Herlihy said customer-backed innovation had contributed more than 3% to revenue growth so far this year, and he expected that contribution to improve incrementally over time. He also said ITW had invested in semiconductor-related equipment and saw opportunities to gain market share as end markets improved.

For the fourth quarter, Larsen said ITW expected revenue to rise sequentially despite fewer shipping days, with operating margin similar to the third quarter. He said North American growth momentum could build, while the company was not expecting much improvement in Europe.

Guidance

ITW raised its full-year 2026 total revenue growth guidance by 50 basis points to 4.5% to 5.5%, which Larsen attributed to current foreign exchange rates. The company raised its GAAP EPS guidance by 5 cents at the midpoint to $11.45 to $11.55. O’Herlihy also said ITW had raised its projection for customer-backed innovation to contribute more than 3% to full-year revenue growth.