Are incremental margins being achieved differently, given strong T&M/Auto but weaker Food Equipment? Is increased inflation impacting margins?

Overall incremental and operating margin assumptions are unchanged for the year. Q1 is seasonally lower, with margins and incrementals expected to improve sequentially. Food Equipment's margin performance was an isolated anomaly in one institutional end market in January, which has since seen improving trends. Growth-challenged businesses like Polymers & Fluids, Automotive, and Construction are still expanding margins. “Seasonally, Q1, as we talked about on the last call, always starts out a little lower and then margins and incrementals improve sequentially as we go through the year.”

What is the confidence level given macro uncertainty and geopolitical events? What is the expected CBI contribution for 2026, and are there opportunities to refocus CBI efforts?

Confidence is higher today as Q1 was in line with plans and CapEx-related segments show meaningfully higher order rates than Q1 organic growth. CBI momentum is strong across all segments, with increasing new product pipelines and successful launches. CBI is tracking well for incremental improvement in 2026 towards 3%+ by 2030, supported by strong patent filings. “As we sit here today, I think it's important to mention that our guidance today is based on the current levels of demand that we're seeing in these businesses. And in some of these businesses, maybe Welding and Test & Measurement, in particular, we are seeing order rates that are meaningfully higher than the organic growth rates that those segments put up in the first quarter.”

How does the proliferation of GLP-1 drugs impact demand for Food Equipment, particularly from restaurants and the hospitality industry, in the long term?

GLP-1 drugs are not currently a significant factor on ITW's radar for Food Equipment. QSR, which might be more directly impacted, represents a smaller portion of their business compared to institutional. The segment has ample room for customer-backed innovation to offset potential pressures. “I would say, Tami, it's not something we're giving a lot of thought to say GLP-1, early days.”

ITW

Illinois Tool Works (ITW) Q1 FY26 earnings call: guidance and Q&A

Earnings call· Mar 2026 (Q1 FY26)· Industrials· Apr 30, 2026

Source: earnings call transcript

Executive summary

Illinois Tool Works Q1 FY26 — Solid Start with Strong CapEx Segment Performance

ITW delivered a solid Q1 FY26, meeting expectations with strong performance in CapEx-related segments like Welding and Test & Measurement, which saw robust order activity. Despite headwinds in consumer-facing markets and specific challenges in Food Equipment, the company's enterprise initiatives drove significant margin expansion. Management raised full-year GAAP EPS guidance, reflecting confidence in continued operational execution and positive demand trends in key areas.

Highlights

Revenue grew 5% with 0.4% organic growth, outperforming underlying end markets.
GAAP EPS increased 12% to $2.66, exceeding expectations.
Operating margin expanded 60 basis points to 25.4%, driven by disciplined execution.
CapEx-related segments, Welding and Test & Measurement and Electronics, delivered strong organic growth of 6% and 5% respectively.
Enterprise Initiatives contributed 120 basis points to operating margin improvement in the quarter.

Concerns

Consumer-facing businesses contended with challenging end market dynamics.
Product Line Simplification (PLS) efforts and delayed Middle East sales reduced organic growth by approximately 1 percentage point.
Food Equipment organic revenue declined 3%, with equipment sales down 6% and a slower start in institutional demand.
Automotive OEM organic revenue declined 1%, as global automotive builds were down more than 3%, with China builds down 10%.

Guidance & targets

Category	Target	Timeline	Confidence
Full year GAAP EPS	$11.10 to $11.50 high materiality	Full year 2026 · FY26	High
Full year organic growth	1% to 3% high materiality	Full year 2026 · FY26	High
Full year operating margin expansion	approximately 100 basis points high materiality	Full year 2026 · FY26	High
Full year operating margin range	26.5% to 27.5% high materiality	Full year 2026 · FY26	High
Full year Enterprise Initiatives contribution to margin	approximately 100 basis points medium materiality	Full year 2026 · FY26	High
Full year incremental margins	mid- to high 40s medium materiality	Full year 2026 · FY26	High
Full year effective tax rate	23% to 24% medium materiality	Full year 2026 · FY26	High
Full year free cash flow conversion	exceed 100% of net income medium materiality	Full year 2026 · FY26	High
Full year share repurchases	approximately $1.5 billion high materiality	Full year 2026 · FY26	High
Full year EPS split	48-52 low materiality	Full year 2026 · FY26	High
Q2 EPS contribution	about 25% low materiality	Q2 · FY26	High
Q2 sequential operating margin improvement	more than 100 basis points medium materiality	Q2 · FY26	High
CBI contribution to revenue	3%+ medium materiality	by 2030	High
Total revenue growth	2% to 4% high materiality	Full year 2026 · FY26	High

Segment performance

Segment	Revenue	YoY	QoQ	Margin
Automotive OEM Outperformed global automotive builds despite a decline in organic revenue. China significantly outperformed its market builds. Expects 200-300 bps outperformance vs. builds for full year. Organic revenue: declined 1%Outperformed global automotive builds: down more than 3%North America organic growth: down 5%Europe organic growth: flatChina organic growth: declined 3%China automotive builds: down 10%Operating margin improvement: 170 basis points	increased 4%	—	—	21%
Food Equipment Strength in service partially offset equipment decline. Slower institutional demand in North America, but gradual improvement seen since January. International projected to deliver positive organic growth starting in Q2. Organic revenue: down 3%Service growth: 3%Equipment decline: 6%North America organic growth: down 5%International organic growth: flatQSR growth: double digits	2%	—	—	—
Test & Measurement and Electronics Standout quarter with highest organic growth in 3 years, indicating a sustainable recovery. Strong order activity and market indicators support positive demand trends. Organic growth: 5%Electronics growth: 10%Semi-related businesses growth: more than 15%Semi-related businesses annual revenue: ~$500 million (15% of segment)	10%	—	—	—
Welding Strong top-line performance driven by new products and broad-based growth in North America across industrial and commercial. International faced a difficult comparison. Organic growth: 6%Equipment growth: 8%North America growth: 8%Filler metals growth: mid-single-digitInternational organic growth: down 6%	7%	—	—	32.1%
Polymers & Fluids Growth driven by new products and market share gains in automotive aftermarket. Polymers and Fluids were flat against tough comparisons. Organic growth: 2%Automotive aftermarket growth: 3%Polymers organic growth: flatFluids organic growth: flatOperating margin expansion: 150 basis points	5%	—	—	28%
Construction Products Best organic growth performance in 4 years despite overall decline. Residential and renovation showed positive growth in North America. Organic growth: declined 1%North America organic growth: flatResidential and renovation organic growth: 1%Europe organic growth: down 3%Australia, New Zealand organic growth: down 2%	3%	—	—	—
Specialty Products Organic revenue impacted by PLS activities and delayed Middle East sales. Despite top-line pressure, expanded operating margin due to margin tailwind from recent PLS activities. Organic revenue: down 5%Operating margin expansion: 40 basis points	down 1%	—	—	31.3%

Orderbook & backlog

Order activity strong Q1 FY26

Strong order activity in CapEx-related segments (Welding, Test & Measurement and Electronics) and continued into Q2. Specialty Products has significant order and backlog.

Risks & headwinds

Challenging end market dynamics for consumer-facing businesses Q1 FY26

Automotive OEM organic revenue down 1%; Food Equipment organic revenue down 3%; Construction Products organic growth declined 1%.

Mitigation:Outperforming underlying markets; disciplined operational execution on profit drivers.

Impact of Product Line Simplification (PLS) and delayed Middle East sales Q1 FY26

Reduced Q1 organic growth rate by approximately 1 percentage point; Specialty Products organic revenue down 5%.

Mitigation:PLS activities provide margin tailwind; Middle East sales expected to come back.

Slower institutional demand in Food Equipment Q1 FY26

North America Food Equipment organic growth down 5%, particularly in the education end market.

Mitigation:Gradual improvement in institutional demand trends since January; strong innovation in Food Equipment.

Global automotive builds decline Q1 FY26

Global automotive builds down more than 3%; China builds down 10% in Q1.

Mitigation:Outperforming global automotive builds by 200-300 basis points; China builds projected to improve sequentially in Q2.

Inflationary pressures Full year 2026

Not explicitly quantified in Q1, but expected to be managed.

Mitigation:Price/cost expected to be modestly accretive to margins; divisions have reacted with increased pricing expected in Q2-Q4; supply chain actions.

Q&A highlights

Are CapEx businesses (T&M, Welding) trending ahead of expectations, while consumer/institutional (Food Equipment, Specialty) are below, and do they net out?

CapEx segments like T&M (especially semi-related) and Welding are seeing very strong trends and order activity, exceeding expectations. Consumer-facing markets are challenged but ITW is outperforming them. All 7 segments are still expected to show positive organic growth for the year.

“I think it's a tale of 2 markets right now. We're seeing the industrial markets, CapEx market is very strong, [indiscernible] order activity, but even in those consumer-facing markets, which are improving a little bit, we're all growing those markets.”

asked by Andrew Kaplowitz · answered by Christopher O'Herlihy

2 min read 6 chapters

Detailed narrative

Enterprise Initiatives Driving Margin Expansion

ITW's enterprise initiatives, encompassing strategic sourcing and 80/20 front-to-back activities, significantly contributed 120 basis points to operating margin in Q1. This performance aligns with the full-year expectation of approximately 100 basis points impact, independent of volume. These initiatives are crucial for the company's long-term goal of achieving a 30% operating margin by 2030, demonstrating consistent execution on core operational strategies.

Progress on Customer-Backed Innovation (CBI)

The company is making strong strides in its customer-backed innovation (CBI) agenda, aiming for a consistent 3%+ contribution to revenue by 2030. This is identified as a primary driver for achieving 4%+ high-quality organic growth across the enterprise. Patent filings, which increased 18% in 2024 and 9% in 2025, are considered a strong leading indicator, reflecting ITW's focus on protecting important customer solutions and correlating with future revenue growth.

Divergent Market Trends: CapEx vs. Consumer

ITW observed a clear divergence in market dynamics, with robust demand and strong order activity in CapEx-related segments such as Test & Measurement and Welding. Welding, in particular, showed broad-based growth across both industrial and commercial platforms. Conversely, consumer-facing businesses faced challenging end markets, though ITW continued to outperform global automotive builds and demonstrated healthy market growth in the automotive aftermarket, showcasing resilience in tougher environments.

Q1 Performance and Increased Outlook Confidence

The first quarter results were in line with ITW's internal plan, with total revenue growth of 4.6% and organic growth of 0.4%, leading to a 12% increase in GAAP EPS to $2.66. Management expressed increased confidence in achieving the full-year organic growth guidance of 1% to 3%, citing strong order rates in CapEx-related segments that are meaningfully higher than the Q1 organic growth rates, providing positive momentum for the remainder of the year.

Strategic Pricing and Cost Management

ITW anticipates that price/cost dynamics will be modestly accretive to margins for the full year, effectively managing recent tariff changes and material cost increases through corresponding pricing and supply chain actions. Divisions have implemented increased pricing in response to inflationary pressures, with the impact expected to materialize primarily in the second quarter and continue through the third and fourth quarters, ensuring margin protection.

Impact of PLS and Middle East Sales on Growth

The company's Product Line Simplification (PLS) efforts, which were front-end loaded in the quarter, combined with delayed sales to the Middle East (representing approximately $100 million annually), collectively reduced the Q1 organic growth rate by about 1 percentage point. These factors particularly affected the Specialty Products segment, contributing to its 5% organic decline, but are expected to normalize as the year progresses.

Summary of the company's earnings call; see how call summaries are prepared. Not investment advice.