Illinois Tool Works Inc. 2026 Q3 Earnings Call

President and CFO, Michael Larsen. During today's call, we will discuss ITW's third quarter 2026 financial results and provide guidance for full year 2026. Slide 2 is a reminder that this presentation contains forward-looking statements. Please refer to the company's 2025 Form 10-K and subsequent reports filed with the SEC for more detail about important risks that could cause actual results to differ materially from our expectations. This presentation uses certain non-GAAP measures, and a reconciliation of those measures to the most directly comparable GAAP measures is contained in the press release. Please turn to slide 3, and it's now my pleasure to turn the call over to our President and CEO, Chris O'Herlihy.

Chris? Thank you, Erin, and good morning, everyone.

As you saw in our press release this morning, the ITW team delivered another quarter of strong operational and financial performance. Our third quarter highlights include organic growth of 4%, or 5% excluding the impact of a tornado event at one of our Welding locations. Our top line was fueled by another meaningful increase in Customer-Back Innovation, and we are raising our full year CBI projection to 3% plus. Operating margin expanded 40 basis points to 27.8%, and operating income increased 6%, marking a new quarterly record for ITW. GAAP EPS exceeded our estimate and increased 7% to $3. Demand momentum this quarter continued to accelerate in our two CapEx related segments. There were organic growth of 16% in Test & Measurement and Electronics and 7% in Welding, or 15% excluding the tornado event.

In addition, Polymers & Fluids grew 8% due to robust contributions from both market share gains and new products. Beyond capitalizing on favorable market conditions, we continue to make meaningful progress on our long-term organic growth agenda across all segments. On that note, I am very encouraged by our Customer-Back Innovation progress, which so far this year has contributed more than 3% to revenue growth compared to 2.4% in 2025. As I mentioned, we are now projecting that CBI will exceed 3% for the full year, which is the single biggest catalyst for achieving our enterprise goal of sustained high-quality organic growth of 4% or higher. Our performance year to date offers another proof point that disciplined execution on our next phase enterprise strategy priorities is yielding strong results, positioning us very well for 2027 and putting us firmly on track to achieve our 2030 performance goals.

Before I transition to the bottom line, let me spend just a minute on the unfortunate tornado event that we mentioned on our call in July, which damaged two of our Welding facilities and reduced our revenues by about $40 million, or one percentage point in the third quarter. I am pleased to say that our colleagues were all safe, and the team did an outstanding job, quickly and safely restoring operations and taking care of customers. Our swift recovery serves as a great demonstration of our ability to read and react, a key proof point of the value of ITW's decentralized entrepreneurial culture. With Welding order growth running well ahead of revenue, we expect Welding to return to strong growth again in the fourth quarter and carry good momentum into next year.

On the bottom line, the ITW team continued to execute at a high level, with enterprise initiatives contributing 130 basis points to our operating margin. In a very dynamic inflationary environment, our teams continue to respond decisively and effectively. Overall, price cost was favorable in the third quarter. As you can see, in a few segments such as Automotive OEM and Construction Products, we have some catching up to do. Turning to capital allocation, in the quarter, we raised our dividend 7%, marking our 63rd consecutive year of dividend increases. In the first three quarters of the year, we have returned $2.7 billion to shareholders through share repurchases and dividends. In terms of our outlook, we are raising our full year GAAP EPS guidance by $0.05 to a new midpoint of $11.50, reflecting 10% year-over-year growth. This marks our third guidance increase of the year.

Looking ahead to 2027, and with the caveat that we haven't developed our annual plans yet, demand momentum continues to build across several of our end markets, notably in Welding and Test & Measurement and Electronics. In addition, we are exiting this year with CBI already at 3%+. We would expect another meaningful contribution from our enterprise initiatives and incremental margins in the 40%+ range. Our long-term performance framework, 4%+ organic growth and 30% operating margins by 2030, is very much intact and remains well within our reach. In conclusion, I want to thank our dedicated ITW colleagues around the world. This quarter, in particular, the Welding folks in Appleton, Wisconsin, for their dedication to serving our customers and executing our strategy with excellence. With that, I'd hand the call over to Michael to walk you through the segment details and updated full-year outlook.

Michael. Thank you, Chris, and good morning, everyone.

Starting with the top line, total revenue grew 4.4%, driven by 3.8% organic growth, a 0.3% contribution from foreign currency translation, and 0.3% from an acquisition. Excluding the tornado event in Welding, our organic growth rate would have been approximately 4.8%. Importantly, order growth continued to accelerate in both Welding and Test & Measurement and Electronics, and demand remained strong in Polymers & Fluids. Moving to the bottom line, operating margin expanded by 40 basis points year-over-year to 27.8%, with another solid 130 basis points contribution from enterprise initiatives. Sequentially, margins improved 110 basis points from Q2. In the quarter, price increases and other actions offset higher raw material costs in dollar and margin terms. Those favorable drivers were partially offset by inflation in other areas, such as employee-related costs. Free cash flow was $851 million, or 100% of net income.

On a year-to-date basis, free cash flow grew 9% to more than $2 billion or 82% of net income. Finally, GAAP EPS was $3, an increase of 7%, despite a headwind of about $0.10 from a higher tax rate of 24.4% compared to 21.8% last year. Overall, a strong quarter operationally and financially, and with significant positive momentum going forward. Turning to slide 4, from a regional perspective, organic growth was up 6% in our largest region, North America. Asia Pacific was up 3%, with China down 2%, primarily due to a tough comparison of +10%, and Europe was flat. Moving to the segment highlights, starting with Automotive OEM, organic revenue was down 2% against a tough comparison last year of +5%. In Q3, North America was down 1%, Europe down 7%, and China was down 1%.

In the quarter, we meaningfully outperformed build rates in both North America and China, while Europe was impacted by unfavorable customer mix and product line simplification. For the full year, we expect to outperform builds and remain well-positioned to continue to execute on our long-term growth opportunities, such as EV growth in China. Operating margin was down 170 basis points, primarily due to resin inflation and the resulting price cost timing lag, which was partially offset by favorable enterprise initiatives. As usual, we expect to recover the price cost impact over time, helped by new product launches, and we remain on track to achieve our longer-term margin targets for the segment. Turning to slide 5, Food Equipment organic revenue grew 1% overall as service strength of +5% helped offset a 2% decline in equipment, which marked a notable sequential improvement from the mid-single-digit equipment declines in the first half.

Regionally, North America was down 3% due to soft but sequentially improving institutional demand in areas such as K through 12, which are impacted by a decline in funding levels, partially offset by high single-digit growth in areas such as retail. On a positive note, international again delivered strong growth, up 5% in the quarter. Operating margin improved 60 basis points to 29.8%. Looking ahead, with North America orders up mid-single digits this quarter, we are now projecting year-over-year organic growth in the low single digits and operating margin expansion in Q4. Test & Measurement and Electronics had another outstanding quarter, with 16% organic growth, led by a 31% surge in electronics, which represents approximately 40% of this segment. Test & Measurement was up 8%, driven primarily by semiconductor demand, with general industrial order activity also beginning to pick up.

The two main drivers of the strong growth that we're seeing in this segment are, first, our electronic assembly businesses, which serve the printed circuit board industry, and second, our semiconductor-related businesses, which serve the chip manufacturing industry. Staying invested in our strategic growth initiatives in those businesses through the cycle has positioned us to take full advantage of the significant growth opportunities that remain ahead as orders continue to outpace revenue growth by a wide margin. Operating margin expanded by 330 basis points to 28.7%, primarily as a result of strong operating leverage. Moving on to slide 6, Welding was obviously impacted by the tornado event in the quarter, but still managed to deliver remarkably resilient top and bottom-line results, including 7% organic growth, which would have been 15% excluding the tornado event.