Illinois Tool Works NYSE: ITW closed out 2025 with what management called a “solid finish,” highlighted by improved demand trends, record operating margins, and a 2026 outlook that calls for continued earnings growth and further margin expansion driven primarily by the company’s Enterprise Initiatives.
Fourth-quarter results: market outperformance and record margins
CEO Chris O’Herlihy said ITW delivered fourth-quarter revenue growth of more than 4% and a 7% increase in GAAP earnings per share to $2.72. Organic growth was 1.3%, which management described as the company’s best quarterly organic performance of the year, supported by a sharper-than-normal sequential improvement from the third quarter.
CFO Michael Larsen said total revenue rose 4.1%, reflecting 1.3% organic growth, 2.5% from foreign currency translation, and 0.3% from acquisitions. Larsen noted Q4 revenue increased 4% sequentially from Q3, above the company’s historical sequential average of about 2%.
Profitability was a focal point. ITW posted fourth-quarter operating income of $1.1 billion, up 5%, and a “record” operating margin of 26.5%. Segment operating margin was 27.7%, up 120 basis points, with Enterprise Initiatives contributing 140 basis points. Larsen said all seven segments expanded operating margins, with Enterprise Initiatives contributing between 80 and 210 basis points by segment.
ITW also reported free cash flow conversion to net income of 109% for the quarter, repurchased $375 million of shares, and recorded a tax rate of 22.8%.
Segment performance: strength in several businesses, construction remained a headwind
Management detailed mixed end-market conditions across the portfolio, including a continued decline in Construction Products, offset by growth in several other segments.
- Automotive OEM: Revenue increased 6% (organic up 2%). North America grew 2%, Europe declined 1%, and China grew 5%. Larsen said the segment outperformed relevant builds in 2025 and the company expects its “typical” 200–300 basis points of outperformance in 2026. Full-year 2025 margins improved 150 basis points to 21.1%, consistent with goals outlined at the 2023 Investor Day.
- Food Equipment: Revenue rose 4% (organic up 1%). Equipment was flat while service grew 3%. North America was flat, with institutional end markets up high single digits and restaurants down high single digits; retail rose nearly 5%. International grew 2%, including 2% in Europe.
- Test & Measurement and Electronics: Revenue increased 6% (organic up 2%). Test & Measurement rose 3% while Electronics was flat against a tough comparison. Larsen said semiconductor and electronics activity improved, with semi-related businesses up mid-single digits. Operating margin improved 110 basis points to 28.1%.
- Welding: Revenue grew 3% (organic up 2%). Equipment rose 4%; consumables were flat, with filler metals up high single digits. Operating margin increased 210 basis points to 33.3%.
- Polymers & Fluids: Organic growth was 5%, supported by new product launches in automotive aftermarket. Polymers rose 4% and Fluids grew 6%. Operating margin expanded 110 basis points to 29%.
- Construction Products: Organic revenue declined 4%. North America fell 4%, with residential renovation down 5% while commercial construction increased 5%. Europe declined 5%, and Australia/New Zealand was flat. Despite the sales decline, margins improved 100 basis points to 29%.
- Specialty Products: Revenue rose 4% (organic up 1%). Equipment grew 12% while consumables fell 2%. North America was flat and international grew 3%.
Strategic drivers: Customer-Backed Innovation, Enterprise Initiatives, and PLS
O’Herlihy emphasized Customer-Backed Innovation (CBI) as a key driver of above-market organic growth. The company reported 2.4% CBI-fueled revenue growth in 2025, a 40 basis point improvement year over year, and reiterated a longer-term goal of 3%+ by 2030. Management also highlighted patent filings as a leading indicator, noting filings increased 9% in 2025 after an 18% increase in 2024.
On profitability, executives repeatedly pointed to Enterprise Initiatives as the central engine behind recent margin expansion and the 2026 outlook. In Q4, Enterprise Initiatives contributed 140 basis points to operating margin, and management expects another 100 basis points of margin contribution from these initiatives in 2026, which Larsen said is “largely independent of volume.”
Product Line Simplification (PLS) was described as a separate, ongoing effort tied to ITW’s 80/20 Front-to-Back approach and portfolio pruning. Management said PLS is expected to be at a “maintenance level” in 2026 of roughly 30–50 basis points, lower than 2025, while CBI contribution is expected to rise again.
2026 guidance: modest organic growth, EPS up 7%, and continued buybacks
For 2026, ITW guided to total revenue growth of 2%–4% and organic growth of 1%–3%, based on “current levels of demand” and typical seasonality. The company expects operating margin to improve about 100 basis points to a range of 26.5%–27.5%, and projected GAAP EPS of $11.00–$11.40, implying 7% growth at the $11.20 midpoint.
Larsen said the company expects a first-half/second-half EPS split of approximately 47%/53%, consistent with 2025, with the first quarter contributing roughly 23% of full-year EPS. He also said ITW expects free cash flow conversion to net income of greater than 100% and plans to repurchase approximately $1.5 billion of shares in 2026.
On what could temper margin expansion, Larsen cited wage and benefits inflation and continued investment to accelerate organic growth and sustain productivity. He added that if demand improves toward the higher end of the company’s guidance range, stronger margins could follow given the incremental margin profile management expects.
Q&A highlights: semiconductors, China, and M&A discipline
In the question-and-answer session, management said it saw improving orders in general industrial markets within Test & Measurement and an uptick in semiconductor and electronics demand in Q4. O’Herlihy said semiconductors represent about 15% of Test & Measurement (and management later characterized it as about 3% of ITW overall), and while the company has seen “head fakes” before, the current improvement “seems sustainable based on what we see right now.”
Executives also discussed regional trends, describing North America as “encouraging,” Europe as more challenging with limited expected improvement, and Asia Pacific—driven primarily by China—expected to contribute mid-single-digit growth. Management said China is about $1.2 billion in revenue, roughly 8% of company sales, and is expected to grow in the mid- to potentially high single digits in 2026. Within Automotive OEM in China, executives pointed to electric vehicle penetration and growth with Chinese OEMs as key drivers, with management expecting mid- to high-single-digit growth in China auto OEM.
On capital allocation, ITW said M&A remains “on the table” but opportunistic, with a focus on high-quality deals and disciplined valuation. Management also highlighted the role of share repurchases, with Larsen saying the buyback program contributes roughly $0.20 per share, or about 2% EPS growth annually.
About Illinois Tool Works NYSE: ITW
Illinois Tool Works Inc (ITW) is a diversified industrial manufacturer that designs and produces a broad array of engineered products, consumables and related service solutions for industrial customers. Its offerings span engineered fastening systems, specialty components, industrial equipment, welding products, foodservice and packaging equipment, adhesives and polymer products, and test-and-measurement technologies. These products are used as critical inputs by customers across automotive, construction, electronics, foodservice, maintenance and other industrial end markets.
The company operates a decentralized business model in which independently managed businesses focus on niche product lines and close customer relationships.
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