ITW’s Margins Surge Past Expectations—But Growth Wonders Remain

Date of Call: Feb 3, 2026

Financials Results

• Revenue: 4.1% growth, with organic growth of 1.3% and sequential growth of 4% from Q3
• EPS: $2.72 per diluted share, a 7% increase in GAAP EPS
• Operating Margin: 26.5% record operating margin, up 120 basis points in segment margins

Guidance:

• Organic growth projected at 1% to 3% for 2026.
• GAAP EPS range of $11 to $11.40, representing 7% growth at the midpoint.
• Operating margin expected to improve by approximately 100 basis points to 26.5% to 27.5%.
• Free cash flow conversion to net income expected to be greater than 100%.
• Plan to buy back approximately $1.5 billion of shares in 2026.

Business Commentary:

Revenue Growth and Market Outperformance:

• ITW delivered a revenue growth of 4.1% in Q4 2025, with organic growth at 1.3%.
• The growth was driven by higher-than-normal sequential improvement in demand and disciplined operational execution.

Operating Margin Expansion:

• ITW's segment margins were 27.7%, up 120 basis points, with a 140 basis point contribution from enterprise initiatives.
• The expansion was attributed to operational execution and contributions from enterprise initiatives.

Customer-Backed Innovation (CBI) Contribution:

• ITW achieved 2.4% CBI fueled revenue growth in 2025, a 40 basis point improvement.
• This was driven by successful product launches across the company, with a notable increase in patent filings.

Segment Performance and Outlook:

• Automotive OEM segment revenue increased 6% with organic revenue up 2%, while Test & Measurement and Electronics saw a 6% revenue increase with organic growth of 2%.
• The strong performance was due to improvements in bookings and demand, particularly in semi-related businesses.

Guidance and Strategic Positioning:

• ITW projects 1% to 3% organic growth for 2026, with an EPS guidance midpoint of $11.20, representing 7% growth.
• This outlook is based on current demand levels adjusted for seasonality and is supported by ongoing investments in high-return internal projects.

Sentiment Analysis:

Overall Tone: Positive

• CEO stated, 'ITW delivered a solid finish to the year' and 'We enter 2026 with solid momentum.' CFO noted 'solid operational and financial finish to the year' and 'well positioned to capitalize on any further improvement in the macro environment.' Management highlighted record operating margins and strong segment performances, particularly in Test & Measurement and Welding.

Q&A:

• Question from Andrew Kaplowitz (Citigroup Inc., Research Division): Are you seeing a more definitive turn in semiconductor and an unlock of CapEx businesses in general?
  Response: Management sees sustainable improvement in semiconductors and meaningful improvement across Test & Measurement and Welding, with strong orders and backlog supporting 2026 guidance.

• Question from Andrew Kaplowitz (Citigroup Inc., Research Division): How should we think about margin performance across segments in 2026?
  Response: Expect every segment to improve operating margins, driven by ~100 basis points from enterprise initiatives and positive operating leverage with incrementals in the mid- to high 40s.

• Question from Joseph Ritchie (Goldman Sachs Group, Inc., Research Division): Can you elaborate on price/cost dynamics and the impact of resin price changes?
  Response: Price/cost is slightly favorable but not a major driver; resin costs are a small portion of COGS and not material to overall performance, with limited impact from long-term contracts.

• Question from Julian Mitchell (Barclays Bank PLC, Research Division): What is the typical seasonality for 2026 and any unusual factors?
  Response: Expect typical seasonality with Q1 revenue down sequentially and margins modestly lower, then improving through the year; each quarter projected to have year-over-year revenue and margin growth.

• Question from Julian Mitchell (Barclays Bank PLC, Research Division): What should we expect for CBI contribution and product line simplification (PLS) in 2026?
  Response: CBI contribution to revenue is expected to improve further, with patent filings as a leading indicator; PLS will be lower (30-50 bps) but provides ongoing benefits for growth and margins.

• Question from Scott Davis (Melius Research LLC): Why wasn't M&A mentioned, and is it off the table for 2026?
  Response: M&A remains on the table for high-quality, strategic fits but is selective due to compelling organic growth opportunities and challenging valuations; active prospecting continues for the right deals.

• Question from Scott Davis (Melius Research LLC): What drives CBI to 3%+ and is more spending required?
  Response: It's not about spending more but focused leadership and codified innovation practices; momentum is building with patent growth, and the 3%+ target is within reach.

• Question from Tami Zakaria (JPMorgan Chase & Co, Research Division): What drives strong auto growth in China, and what's the outlook for 2026?
  Response: Growth in China auto is driven by strong penetration in EVs and innovation; expect mid- to high single-digit growth in China auto OEM in 2026, with China overall growing mid- to high single digits.

• Question from Tami Zakaria (JPMorgan Chase & Co, Research Division): How do you think about growth in the Americas versus Europe for the organic outlook?
  Response: Expect North America to grow ~2%+, Europe similar to 2025, and Asia Pacific (including China) to grow mid-single digits to achieve the 1% to 3% organic growth target.

• Question from Jamie Cook (Truist Securities, Inc., Research Division): Why were sequential revenue growth higher (4%) than historical average?
  Response: Broad-based improvement, more pronounced in segments with high CBI contribution like Test & Measurement and Polymers & Fluids, reflecting market tailwinds after years of headwinds.

• Question from Jamie Cook (Truist Securities, Inc., Research Division): Why are incremental margins in the mid- to high 40s for 2026, above the historical 35-40% target?
  Response: Due to improved portfolio quality from years of PLS, continuous business model improvements, and new high-margin products, making mid-40s incrementals sustainable.

• Question from Steven Fisher (UBS Investment Bank, Research Division): Why aren't margins higher after adjusting for enterprise initiatives, given positive organic growth?
  Response: Margin expansion is offset by inflation in employee-related costs and internal investments to accelerate organic growth; the range accounts for this, with potential for higher margins if demand recovers.

• Question from Steven Fisher (UBS Investment Bank, Research Division): Was commercial construction up in North America, and does that trend continue?
  Response: Commercial construction was up but is a small part of the business; improvement in 2026 is more tied to less PLS and more CBI, not this segment.

• Question from Sabrina Abrams (BofA Securities, Research Division): Does organic growth accelerate through the year given FX tailwinds in Q1?
  Response: Yes, organic growth is lower in Q1 due to FX tailwinds, then improves in subsequent quarters as per typical seasonality.

• Question from Sabrina Abrams (BofA Securities, Research Division): Why was Polymers & Fluids strong in Q4, and is the 1-3% guide conservative?
  Response: Strength driven by CBI new products in automotive aftermarket (e.g., wiper blades) and biopharma reagents; Q4 was above typical run rate, so guide reflects that.

• Question from David Raso (Evercore ISI Institutional Equities, Research Division): How is January tracking versus the guide, and what about inventory?
  Response: January is on track with typical seasonality; inventory decreased normally at year-end, not due to lower growth expectations, and there's no unusual inventory reduction.

• Question from David Raso (Evercore ISI Institutional Equities, Research Division): Is semiconductor a big part of the incremental margin improvement in Test & Measurement?
  Response: Semiconductor is 15% of Test & Measurement and contributes to above-average incrementals during upturns, but it's a small part of overall ITW margins.

Contradiction Point 1

Test & Measurement Segment Recovery Outlook

Contradiction on the nature and drivers of expected Test & Measurement recovery.

Is the improvement in Test & Measurement and semicon now a definitive turnaround after past setbacks? - Andrew Kaplowitz (Citigroup Inc., Research Division)

2025Q4: Test & Measurement had a solid quarter after a challenging year, with improvement in bookings and demand for semi and electronics. - Christopher O'Herlihy(CEO)

What factors are driving the ongoing organic revenue decline in Construction Products despite rising margins, and what visibility do you have for Test & Measurement improvements in Q4? - Jeffrey Sprague (Vertical Research Partners, LLC)

2025Q3: For Test & Measurement, Q4 improvement is expected due to a normal cyclical recovery from Q3's mixed demand and a deceleration in semiconductor-related markets, which is anticipated to improve. - Christopher O'Herlihy(CEO)

Contradiction Point 2

Primary Driver for 2026 Margin Expansion

Shift in stated primary contributor to expected margin improvement.

How should we model margin expansion across all segments in 2026, considering growth, construction's Q4 performance, and metals inflation? - Andrew Kaplowitz (Citigroup Inc., Research Division)

2025Q4: Every segment is expected to improve operating margins in 2026, driven by enterprise initiatives contributing about 100 basis points and positive operating leverage with incremental margins in the mid- to high 40s. - Michael Larsen(CFO)

Can you break down next year's margin factors, specifically restructuring paybacks and price/cost dynamics? - Julian Mitchell (Barclays Bank PLC, Research Division)

2025Q3: Margin drivers for 2026 will be led by enterprise initiatives (historically ~100 bps of improvement), with incremental margins likely above the 35-40% historical range. - Michael Larsen(CFO)

Contradiction Point 3

Outlook and Scale for Product Line Simplification (PLS)

Contradiction on the expected level and impact of PLS activity in 2026.

What progress should be expected in 2026 regarding CBI's 2.4% sales contribution (up 40 bps year-over-year), and what are your thoughts on product line simplification? - Julian Mitchell (Barclays Bank PLC, Research Division)

2025Q4: Product Line Simplification (PLS) is a separate, more maintenance-level effort (30-50 bps in 2026) focused on portfolio pruning. - Christopher O'Herlihy(CEO)

With U.S. policies promoting auto production, is this an opportunity for your supply position? Will PLS remain around 1%? - Tami Zakaria (JPMorgan Chase & Co, Research Division)

2025Q3: Regarding PLS, it is a bottom-up, ongoing strategic review. While 2025 has been a heavy-lifting year, future levels will be determined by each business's strategic needs, but it remains a value-creating activity for long-term growth and margin improvement. - Christopher O'Herlihy(CEO)

Contradiction Point 4

CBI Contribution to Segment Margins

Contradiction on whether CBI is a primary driver for near-term margin expansion.

How should we model margin expansion across all segments in 2026, considering construction's Q4 performance and metals inflation? - Andrew Kaplowitz (Citigroup Inc., Research Division)

2025Q4: Every segment is expected to improve operating margins in 2026, driven by enterprise initiatives contributing about 100 basis points and positive operating leverage with incremental margins in the mid- to high 40s. - Michael Larsen(CFO) and Christopher O'Herlihy(CEO)

What caused the reduced operating margin outlook—price-driven volume headwinds or new factors? Will the automotive segment see sequential margin improvement in the back half? - Tami Zakaria (JPMorgan Chase & Co)

2025Q2: The margin guidance reflects that while price actions offsetting tariffs are successful... they are modestly dilutive to margin in the short term (similar to Q2). This is a timing issue; margin is expected to recover, as has happened in past cycles. - Michael Larsen(CFO)

Contradiction Point 5

Segment Margin Expansion Outlook for 2026

Contradiction on the primary drivers and sustainability of expected margin expansion.

How should we model margin expansion across all segments in 2026, considering the typical higher incrementals with growth, the strong Q4 construction margins, and metals inflation? - Andrew Kaplowitz (Citigroup Inc., Research Division)

2025Q4: Every segment is expected to improve operating margins in 2026, driven by enterprise initiatives contributing about 100 basis points and positive operating leverage with incremental margins in the mid- to high 40s. - Michael Larsen(CFO) and Christopher O'Herlihy(CEO)

What caused the reduced operating margin outlook—price increases leading to volume headwinds or a new factor—and will the automotive segment see sequential margin improvement in the back half? - Tami Zakaria (JPMorgan Chase & Co)

2025Q2: The margin guidance reflects that while price actions offsetting tariffs are successful... they are modestly dilutive to margin in the short term (similar to Q2). This is a timing issue; margin is expected to recover, as has happened in past cycles. - Michael Larsen(CFO)