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    ITW
    Earnings call· Jun 2026(Q2 FY26)

    ILLINOIS TOOL WORKS Q2 FY26 earnings call ITW

    Jul 28, 2026 Source

    Executive summary

    Illinois Tool Works Q2 FY26 — Record Profitability and Raised Full-Year Guidance

    Illinois Tool Works delivered robust Q2 FY26 results, marked by record operating income and strong organic growth, particularly in CapEx-focused segments. The company raised its full-year guidance for both top and bottom lines, driven by accelerating demand and effective execution of its enterprise strategy, including significant contributions from customer-back innovation. Management remains confident in its long-term growth and margin expansion trajectory despite temporary price-cost pressures.

    Highlights

    5

    • Achieved 4.5% organic growth, driven by strong CapEx-related businesses.

    • Expanded operating margin to 26.7%, a 40 basis point increase year-over-year, with enterprise initiatives contributing 120 basis points.

    • Delivered a record $1.15 billion in operating income, up 7.4% year-over-year, marking the most profitable quarter in company history.

    • Increased GAAP EPS by 10% to $2.84, and raised full-year EPS guidance by $0.15 to a new midpoint of $11.45.

    • Customer-Back Innovation (CBI) contributed 3% to first-half revenue growth, exceeding prior year's full-year contribution.

    Concerns

    3

    • Operating margin was temporarily diluted by 40 basis points due to timing lags between inflation and price adjustments, particularly in crude oil derivatives.

    • Specialty Products segment experienced a 110 basis point margin decline due to price-cost timing lags.

    • Automotive OEM in Europe saw a 5% organic revenue decline.

    Guidance & targets

    14
    CategoryTargetConfidence
    Full-year 2026 Organic Growth
    3% to 4%
    high materiality
    High
    Full-year 2026 GAAP EPS
    $11.35 to $11.55
    high materiality
    High
    Full-year 2026 Operating Margin
    26.5% to 27.5%
    medium materiality
    High
    Full-year 2026 Effective Tax Rate
    23% to 24%
    low materiality
    High
    Full-year 2026 Free Cash Flow Conversion
    Exceed 100% of net income
    medium materiality
    High
    Full-year 2026 Share Repurchases
    Approximately $1.5 billion
    high materiality
    High
    Automotive OEM Outperformance vs. Global Builds
    200 to 300 basis points
    medium materiality
    High
    Food Equipment Organic Revenue Growth
    Turn positive
    medium materiality
    Medium
    Food Equipment Margins
    Improve
    medium materiality
    Medium
    Test & Measurement and Electronics Margin Improvement
    Further improvement
    medium materiality
    Medium
    Welding Storm Impact
    No material impact on ITW
    low materiality
    High
    Implied H2 FY26 Organic Growth
    4.5%
    high materiality
    High
    Enterprise Initiatives Contribution to Operating Margin
    More than 100 basis points
    medium materiality
    High
    Implied Full-Year Incremental Margin
    40%
    medium materiality
    High

    Segment performance

    7
    SegmentRevenueYoYQoQMargin
    Automotive OEM
    Organic revenue was roughly flat, with North America and China showing slight growth, while Europe declined. Operating margin improved despite price-cost timing lags.
    North America organic growth: +1%China organic growth: +1%Europe organic growth: -5%Operating margin improvement: +30 bps
    		—flat—21.6%
    Food Equipment
    Organic revenue was flat, with service strength offsetting equipment decline. North America was down, but international delivered strong growth. Expected to turn positive in H2.
    Service organic growth: +5%Equipment organic decline: -2%North America organic growth: -4%International organic growth: +6%
    		—flat——
    Test & Measurement and Electronics
    Outstanding quarter with strong organic growth, led by electronics. Operating margin expanded significantly. Order growth continues to outpace revenue growth.
    Electronics organic growth: +21% (40% of segment)Operating margin improvement: +240 bpsOrder growth: outpacing revenue growth
    		—+10%—25.2%
    Welding
    Delivered record top-line results with strong organic growth, particularly in North America across industrial and commercial markets. Operating margin remained best-in-class.
    Equipment organic growth: +19%North America organic growth: +19% (85% of segment)Order growth: outpacing revenue growth
    		—+14%—32.4%
    Polymers & Fluids
    Organic growth reached 7% across all platforms, supported by new products and market share gains. Operating margin expanded to a record level.
    Automotive Aftermarket organic growth: +7%Polymers organic growth: +7%Fluids organic growth: +8%CBI contribution: almost 5%
    		—+7%—29.3%
    Construction Products
    Organic growth was positive across all regions, marking the highest rate in four years. Commercial construction in North America showed strong growth.
    North America organic growth: +2%Europe organic growth: +1%Australia and New Zealand organic growth: +2%Residential renovation North America organic growth: +1%Commercial construction North America organic growth: +13% (15% of region)
    		—+2%——
    Specialty Products
    Organic revenue was up, but operating margin declined due to price-cost timing lags, particularly from crude oil derivatives.
    North America organic growth: +2%International organic growth: +1%
    		—+2%—down 110 bps

    Operational metrics

    22
    Organic Growth
    4.5%
    Q2 FY26

    Company-wide organic growth.

    Operating Margin
    26.7%+40 bps YoY
    Q2 FY26

    Company-wide operating margin.

    Operating Income
    $1.15 billion+7.4% YoY
    Q2 FY26

    Company-wide operating income, marking the most profitable quarter in ITW's history.

    Free Cash Flow Conversion
    77%
    Q2 FY26

    Free cash flow conversion rate, in line with typical seasonal trends.

    Share Repurchases
    $750 million
    Q2 FY26

    Opportunistically pulled forward planned Q3 share repurchases.

    Customer-Back Innovation (CBI) Contribution to Revenue Growth
    3%vs 2.4% for FY25
    H1 FY26

    Contribution to revenue growth from new products introduced within the last 3 years, net of cannibalization.

    Enterprise Initiatives Contribution to Operating Margin
    120 bps
    Q2 FY26

    Contribution to operating margin expansion from enterprise initiatives.

    Price-cost timing lag impact on operating margin
    -40 bps
    Q2 FY26

    Temporary dilution of operating margin due to timing lags between inflation and price adjustments, primarily from crude oil derivatives.

    Sequential Revenue Growth
    +7%vs historical average +2%
    Q1 to Q2 FY26

    Sequential revenue growth from Q1 to Q2, significantly above historical average.

    Sequential Operating Margin Expansion
    130 bps
    Q1 to Q2 FY26

    Sequential operating margin expansion from Q1 to Q2.

    Sequential Operating Income Growth
    12%
    Q1 to Q2 FY26

    Sequential operating income growth from Q1 to Q2.

    Organic Growth
    +6%
    Q2 FY26

    Organic growth in North America.

    Organic Growth
    +6%
    Q2 FY26

    Organic growth in Asia Pacific.

    Organic Growth
    +3%
    Q2 FY26

    Organic growth in China.

    Organic Growth
    flat
    Q2 FY26

    Organic growth in Europe.

    Automotive OEM Outperformance vs. Global Builds
    200 to 300 bps
    FY26

    Expected outperformance of the Automotive OEM segment relative to global auto production builds.

    Polymers & Fluids CBI Contribution
    almost 5%
    Q2 FY26

    Contribution of Customer-Back Innovation to revenue growth in the Polymers & Fluids segment.

    Specialty Products Margin Decline
    110 bps
    Q2 FY26

    Decline in operating margin for Specialty Products due to price-cost timing lags.

    Price-cost timing lag impact on operating margin
    maybe 30 bps
    Q3 FY26

    Expected temporary dilution of operating margin due to timing lags between inflation and price adjustments.

    Price-cost timing lag impact on operating margin
    approaching 20 bps
    Q4 FY26

    Expected temporary dilution of operating margin due to timing lags between inflation and price adjustments.

    Full-year Price-cost timing lag impact on operating margin
    about 20 bpsheadwind
    FY26

    Average headwind for the full year from price-cost timing lags.

    Historical Normal Price-cost Contribution to Margin
    +10 to 20 bps
    Historical

    Typical historical margin improvement from price-cost dynamics.

    Industry KPIs

    7
    MetricValueDetails
    Capacity expansioninvested meaningfully
    Tariff cost impactno material recovery
    Parts aftermarket business+7%%
    Data center prime power demandstrengthening demand
    Incremental margin operating leverage40%%
    Order backlog order intake by segmentoutpacing revenue growth
    Industry production market size forecastsdown 2%%

    Deals & partnerships

    1
    UnnamedBolt-on acquisition in the semi manufacturing space

    A bolt-on acquisition in the semi manufacturing space that occurred late last year, characterized by high-quality growth attributes.

    Risks & headwinds

    3
    Price-cost timing lagsQ2 FY26 through Q4 FY26

    40 bps operating margin dilution in Q2 FY26, expected to be 30 bps in Q3 FY26 and 20 bps in Q4 FY26

    Mitigation: Price increases, driving productivity, strategic sourcing efforts, new higher-margin product introductions (CBI).

    Storm impact on Welding facilitiesNear-term

    Damage to 1 manufacturing facility and 1 warehouse building

    Mitigation: Executing contingency plans with a focus on minimizing disruption for customers. No material impact on ITW's guidance expected.

    Inflation (crude oil derivatives, logistics, electronic components)Ongoing

    Meaningful inflation, particularly in resins, chemicals, transportation freight costs, and electronic components

    Mitigation: Utilizing price lever, driving productivity, strategic sourcing efforts. Highly decentralized divisions are adept at reading and reacting to inflationary pressures.

    What to watch in Q3 FY26

    5

    Food Equipment Organic Revenue Growth

    H2 FY26
    Currentflat
    Targetpositive

    Why it matters

    Indicates recovery in a segment that saw flat organic growth in Q2, contributing to overall company performance.

    Looking ahead, we expect that organic revenue growth will turn positive and that margins will improve in the second half.

    Q&A highlights

    8

    Given strong CapEx segment growth and orders outpacing revenue, how durable is this growth, and is ITW building significant backlog, particularly in CapEx businesses?

    Management confirmed strong confidence in the back half of the year due to order activity in Welding and Test & Measurement and Electronics being ahead of revenue rates, leading to more backlog than normal. They also highlighted sustained progress in Customer-Back Innovation (CBI) as a key driver for sustainable growth.

    “But it has to be said that the order activity that we've seen in Welding and Test & Measurement and Electronics has been a good bit ahead of the revenue rates we've been demonstrating. So getting a bit more backlog there than normal, I would say, we're very confident going to the back half of the year based on what we see in terms of the order rates based on what we hear from our customers.”

    asked by Andrew Kaplowitz · answered by Christopher O'Herlihy

    2 min read6 chapters

    Detailed Narrative

    01

    Accelerating Demand and CapEx-Related Growth

    ITW reported strong Q2 FY26 organic growth of 4.5%, significantly driven by its CapEx-related businesses. Welding surged by 14%, Test & Measurement and Electronics by 10%, and Polymers & Fluids by 7%. This acceleration was broad-based across all segments, with sequential revenue growth of 7% from Q1 to Q2, compared to a historical average of 2%. Demand strengthened in key industrial and commercial markets, including infrastructure, energy, aerospace, and defense, contributing to robust performance.

    02

    Customer-Back Innovation (CBI) as a Key Growth Driver

    Customer-Back Innovation (CBI) proved to be a significant catalyst, contributing 3% to first-half revenue growth, already surpassing the 2.4% contribution for the full year 2025. CBI is defined as truly incremental revenues from new products introduced within the last three years, with cannibalization netted out. This metric is a key component of employee compensation from divisions upwards, reflecting ITW's strategic investment in building innovation capabilities and a strong pipeline of new products.

    03

    Record Profitability and Margin Expansion

    The company achieved a record $1.15 billion in operating income, marking its most profitable quarter ever, representing a 7.4% increase year-over-year. Operating margin expanded by 40 basis points to 26.7%, with enterprise initiatives contributing a solid 120 basis points. However, operating margins were temporarily diluted by 40 basis points due to timing lags between inflation and price adjustments, particularly from crude oil derivatives, which management expects to recover over time⏳.

    04

    Strategic Capital Allocation and Shareholder Returns

    ITW returned over $1.2 billion to shareholders in Q2 FY26 through dividends and share repurchases. The company opportunistically bought back $750 million in shares at an average price of $255 per share, representing approximately 1% of outstanding shares. For the full year, ITW targets approximately $1.5 billion in share repurchases. The company maintains an 'active but disciplined' approach to M&A, prioritizing high-quality acquisitions that extend long-term growth potential and leverage its business model.

    05

    Proactive Capacity Management and Market Positioning

    ITW emphasizes its proactive approach to capacity management, ensuring investments are made in advance of growth to match demand. This strategy was particularly evident in the semiconductor and electronics sectors, where sustained investment during a down cycle has positioned the company to fully capitalize on the current ramp-up in the semi industry. This disciplined approach, coupled with differentiated product portfolios and strong customer-facing metrics, enables ITW to gain market share.

    06

    Segment-Specific Performance and Outlook

    Automotive OEM organic revenue was flat, with Europe declining 5% while North America and China grew 1%. Food Equipment saw sequential improvement, with service strength offsetting equipment declines, and is expected to turn positive in H2. Polymers & Fluids achieved a record operating margin of 29.3% with 7% organic growth. Specialty Products experienced a 110 basis point margin decline due to price-cost timing lags, but margins are expected to improve in the second half.

    AI-generated summary of the company’s earnings call. Not investment advice.