Illinois Tool Works (ITW) Q2 FY26 earnings call: guidance and Q&A

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

CBI contributed 3% in H1, ahead of the long-term algorithm. Can this momentum be sustained, or should investors expect even more CBI contribution going forward?

Management is highly encouraged by the strong CBI momentum, which is seen as sustainable due to deep divisional engagement and a robust new product pipeline. They explained that the codified innovation framework, implemented relentlessly since late 2024, is yielding results similar to their 80/20 approach, and they expect CBI contribution to increase across all segments.

“At 3%, no, it's probably a little earlier than we thought, but no surprise, given the way we -- and our teams have embraced this. The way we approach this is very similar to how we approach 80/20 front-to-back 10, 12 years ago in terms of really investing and building capability over the last number of years in CBI.”

asked by Andrew Kaplowitz · answered by Christopher O'Herlihy

Are there any improvements in organic growth quarter-to-date in Q3, or have trends remained stable compared to Q2 across the segments?

Management noted that Q2 saw broad-based acceleration in organic growth across all segments, with April, May, and June showing sequential improvement. They confirmed that Q3 is off to a good start, consistent with the updated guidance that implies sustained 4.5% organic growth in the second half of the year.

“As we went through Q2, April was off to a really good start, sustained that in May and June was even better than that. And we're off to a good start here to Q3 right on track with where we want to be and consistent with the updated guidance that we're providing today, which implies that we can sustain the growth here in the back half of the year at 4.5% organic.”

asked by Tami Zakaria · answered by Michael Larsen

How is CBI measured, particularly regarding cannibalization, and how is it incentivized within the company?

CBI is a truly incremental number, representing revenues from new products introduced within the last three years, with cannibalization explicitly netted out. It is one of four long-term metrics used for compensation, incentivizing employees from divisions upwards on progress in this area. After three years, products roll off the CBI calculation, requiring continuous innovation.

“So the CBI number is a truly incremental number, Scott. It's basically incremental revenues from new products introduced within the last 3 years. It doesn't -- I mean, cannibalization is taken out. So it's all new. This is all really -- these are new actual revenues.”

asked by Scott Davis · answered by Christopher O'Herlihy

Given strong growth and orders outpacing revenue, how is ITW managing capacity, and are there specific areas requiring further investment?

ITW proactively manages capacity using its 80/20 approach, ensuring investments are made ahead of growth to avoid constraints. They cited meaningful investments in semiconductor and electronics over the past few years, which are now enabling them to capitalize on the ramping semi industry. This proactive strategy is applied across all businesses.

“We never allow ourselves to get in a situation where we run our capacity. We're very proactive in ensuring that we add capacity in advance of growth. And effectively, that's what we've been doing for the last number of years. But you cite semi and electronics specifically, obviously, there's been a bit of a down cycle the last couple of years. But given our belief in the business, in our differentiation in that space, we continue to invest meaningfully over the last couple of years.”

asked by Joseph Ritchie · answered by Christopher O'Herlihy

Why wasn't full-year operating margin guidance raised despite increased organic growth? Also, what caused the 110 bps margin decline in Specialty Products?

Management explained that a temporary price-cost timing lag, primarily from crude oil derivatives (resins, chemicals) and logistics, diluted Q2 margins by 40 bps. This lag is expected to persist into Q3 (30 bps) and Q4 (20 bps). Specialty Products was the segment most affected by this lag in Q2. They expect margins to improve in H2 as price increases catch up and new, higher-margin CBI products contribute.

“And so I think a reasonable growth and operating leverage, good progress on the enterprise initiatives and then headwind, actually the segment with the highest headwind on price-cost in the second quarter was Specialty. And so it just takes a little bit longer to get those price increases through in Specialty and in Automotive, to some extent, but they are coming.”

asked by Jamie Cook · answered by Michael Larsen

What are the expectations for incremental margins in 2027, assuming current market dynamics stabilize?

While annual plans for 2027 are not finalized, management indicated that their long-term algorithm for incremental margins is in the 40% to 45% range in a normal environment, up from a previous 35%. They expect this to continue into 2027, driven by portfolio quality, 80/20 execution, and increased CBI contributions, despite the current temporary price-cost headwinds.

“But I think the long-term algorithm here, if you go back and look at our TSR model, has been incremental in that 35% range. We've said previously, that's now in the 40% to 45% range in a normal environment. And so I would characterize the current price-cost environment as a little unusual and kind of a temporary headwind.”

asked by Stephen Volkmann · answered by Michael Larsen

What are the key drivers behind the strong 14% organic growth in the Welding segment, particularly in North America, and was management surprised by this strength?

Management was not surprised, noting that strength began building in Q1 and late Q4 2025. Growth was broad-based across industrial markets (energy, infrastructure, aerospace, construction fabrication, data center construction) and commercial platforms (small fabrication). This was attributed to favorable market demand trends combined with significant progress in new product innovation over the last few years.

“I would say the growth was pretty broad-based, not just in our industrial markets, like energy, infrastructure, aerospace, construction fabrication related to some data center construction, but also what was particularly encouraging was also we saw growth in our commercial platform. So areas like [ small ] fabrication.”

asked by Andrew Obin · answered by Christopher O'Herlihy