Elaborate on the positive price/cost outlook for 2026 and the impact of declining resin prices, especially given historical benefits.

Price/cost is expected to be slightly favorable for 2026, having normalized after tariff-related increases. Resin costs are not a meaningful driver for 2026, as the percentage of COGS is much smaller than historically, and automotive contracts typically don't adjust for resin fluctuations. “At this point, we're back to kind of where we used to be around price cost, which is slightly favorable for full year 2026 but not a big driver of the margin improvement.”

What is the expected progress for CBI in 2026, and any thoughts on PLS?

CBI is expected to show continued incremental improvement in 2026, driven by increased leadership focus, capability building, and a new innovation framework, with patent filings as a strong leading indicator. PLS is seen as a maintenance level activity (30-50 bps contribution) for 2026, focused on portfolio pruning and differentiation. “But PLS for us in '26, we see as more of a maintenance level, 30 to 50 basis points. That's lower than 2025.”

Is M&A off the table for 2026, or is it opportunistic?

M&A is opportunistic and remains on the table for high-quality acquisitions that extend long-term growth and leverage the business model, despite challenging valuations. The company is actively prospecting for such deals, similar to past successful acquisitions like MTS. “It's the latter, Scott. It's certainly on the table for the right companies.”

ITW

Illinois Tool Works (ITW) Q4 FY25 earnings call: guidance and Q&A

Earnings call· Dec 2025 (Q4 FY25)· Industrials· Feb 3, 2026

Source: earnings call transcript

Executive summary

Illinois Tool Works Q4 FY25 — Solid Finish with Strong Margin Expansion and Positive 2026 Outlook

ITW delivered a solid Q4 FY25, marked by strong revenue growth and record operating margins, driven by disciplined execution and enterprise initiatives. The company enters 2026 with positive momentum, projecting continued top and bottom-line growth, underpinned by its customer-backed innovation strategy and sustained productivity efforts.

Highlights

Total revenue grew over 4% in Q4, outperforming underlying end markets.
GAAP EPS increased 7% to $2.72 in Q4.
Segment margins expanded 120 basis points to 27.7% in Q4, with 140 basis points from enterprise initiatives.
CBI-fueled revenue growth reached 2.4% in 2025, a 40 basis point improvement towards the 3% goal.
Free cash flow conversion to net income was 109% for Q4.

Concerns

Europe revenue declined 2% in Q4.
Construction Products organic growth was down 4% in Q4, with residential renovation down 5%.
International Welding declined 5% in Q4 against a tough comparison.

Guidance & targets

Category	Target	Timeline	Confidence
Full-year 2026 Organic Growth	1% to 3% high materiality	Full Year · FY26	High
Full-year 2026 Total Revenue Growth	2% to 4% high materiality	Full Year · FY26	High
Full-year 2026 GAAP EPS	$11.00 to $11.40 high materiality	Full Year · FY26	High
Full-year 2026 Operating Margin Improvement	approximately 100 basis points high materiality	Full Year · FY26	High
Full-year 2026 Operating Margin Range	26.5% to 27.5% high materiality	Full Year · FY26	High
Full-year 2026 Enterprise Initiatives Contribution to Margin	100 basis points medium materiality	Full Year · FY26	High
Full-year 2026 Free Cash Flow Conversion to Net Income	greater than 100% medium materiality	Full Year · FY26	High
Full-year 2026 Share Buybacks	approximately $1.5 billion high materiality	Full Year · FY26	High
Full-year 2026 Incremental Margins	mid- to high 40s high materiality	Full Year · FY26	High
Q1 FY26 EPS Contribution	roughly 23% of the full year total low materiality	Q1 · FY26	High
H1/H2 FY26 EPS Split	47% and 53% low materiality	Full Year · FY26	High
CBI Contribution Goal	3% plus high materiality	Long-term · 2030	High
Automotive OEM Outperformance	200 to 300 basis points medium materiality	Full Year · FY26	High
Product Line Simplification (PLS) Contribution	30 to 50 basis points low materiality	Full Year · FY26	Medium

Segment performance

Segment	Revenue	YoY	QoQ	Margin
Automotive OEM Outperformed relevant builds in 2025 and expects 200-300 basis points of outperformance in 2026. Full year margins improved consistent with the 2023 Investor Day goal. North America growth: 2%Europe growth: -1%China growth: 5%Full year 2025 margin improvement: 150 bps	increased 6%	2%	—	21.1%
Food Equipment Organic growth driven by service, with mixed regional performance in North America. Equipment growth: flatService growth: 3%North America growth: flat (institutional high single digits, restaurants high single digits down, retail nearly 5% up)International growth: 2% (Europe up 2%)	growth of 4%	1%	—	—
Test & Measurement and Electronics Solid quarter with a positive pickup in semiconductor and electronics activity. Operating margins improved significantly. Test & Measurement growth: 3%Electronics growth: flatSemi-related businesses growth: mid-single digitsOperating margin improvement: 110 bps	up 6%	2%	—	28.1%
Welding Strong operating margin expansion despite international decline against a tough comparison. Equipment growth: 4%Consumables growth: flatFiller metals growth: high single digitsNorth America growth: 4%International growth: -5%Operating margin improvement: 210 bps	grew 3%	2%	—	33.3%
Polymers & Fluids Strong top line supported by new product launches in automotive aftermarket and growth in biopharma-focused fluids business. Automotive aftermarket growth: 5%Polymers growth: 4%Fluids growth: 6%North America growth: 5%International growth: 4%Operating margin expansion: 110 bps	—	5%	—	29%
Construction Products Challenging top line, particularly in residential renovation, but successfully expanded margins. North America growth: -4% (residential renovation -5%, commercial construction +5%)Europe growth: -5%Australia and New Zealand growth: flatOperating margin expansion: 100 bps	—	-4%	—	29%
Specialty Products Strong equipment growth offset by decline in consumables. Equipment growth: 12%Consumables growth: -2%North America growth: flatInternational growth: 3%	increased 4%	1%	—	—

Product announcements

Product	Type	Timeline	Details
Rain-X wiper blades	launch	Q4 FY25

Deals & partnerships

Undisclosed acquisition

One bolt-on acquisition in the semi manufacturing space, characterized by high-quality growth attributes.

Risks & headwinds

Challenging external environment FY25

unquantified

Mitigation:Disciplined operational execution and market outperformance.

Challenging valuation trends for M&A Ongoing

unquantified

Mitigation:Disciplined acquisition strategy focused on high-quality, value-accretive deals; active share repurchase program.

Challenging European market FY26

Europe declined 2% in Q4 FY25

Mitigation:Not expecting much improvement, but segments are well positioned to outperform end markets.

Challenging residential construction market FY26

Residential renovation down 5% in Q4 FY25 North America

Mitigation:Company is well positioned to take advantage if the market turns around, though not included in current guidance.

Inflation in employee-related costs FY26

unquantified

Mitigation:Offset by enterprise initiatives and positive operating leverage; strategic investments to accelerate growth.

Dynamic market environment Short-term

unquantified

Mitigation:Feel confident in guidance and well positioned to deliver solid results.

Q&A highlights

Is the semiconductor market turn definitive, and are CapEx businesses seeing general growth?

Management confirmed a solid Q4 for Test & Measurement, with semi-related businesses up mid-single digits. They believe the semi uptick is sustainable, noting strong competitive advantages and improving general industrial orders and backlog, providing good momentum for 2026.

“I would say that the semi at this point seems sustainable based on what we see right now.”

asked by Andrew Kaplowitz · answered by Christopher O'Herlihy

2 min read 6 chapters

Detailed narrative

Customer-Backed Innovation (CBI) Momentum

ITW achieved 2.4% CBI-fueled revenue growth in 2025, a 40 basis point improvement, tracking towards its 2030 goal of 3%+. This progress is supported by a significant increase in patent filings, up 9% in 2025 following an 18% increase in 2024, which serves as a key leading indicator for future revenue growth from customer solutions.

The company has invested in capabilities and codified an effective innovation framework, leading to a doubling of innovation contribution over the last five years.

Sustainable Incremental Margins

The company expects incremental margins in the mid- to high 40s for 2026, a level considered sustainable due to the improved quality of its portfolio from years of Product Line Simplification (PLS) and continuous improvement in its business model. This is achieved while fully funding high-return internal projects aimed at accelerating organic growth and sustaining productivity, demonstrating that the higher incrementals are not at the expense of investment.

Strategic Capital Allocation

ITW remains disciplined in its M&A strategy, focusing on high-quality acquisitions that extend long-term growth potential and leverage the business model for margin improvement, despite challenging valuation trends. Share repurchases, totaling $1.5 billion planned for 2026, remain an important part of capital allocation, contributing approximately $0.20 per share or 2% to annual EPS growth.

The company prioritizes deals that generate a reasonable risk-adjusted rate of return for shareholders.

China Market Strength

China continues to be a strong growth driver for ITW, with full-year 2025 revenue up 9% to $1.2 billion, representing 8% of total revenues. This growth is primarily fueled by the Automotive OEM business, which grew 12% for the full year, driven by successful penetration of the EV space and strong positioning with Chinese OEMs, which now account for over 70% of the market.

Expectations for 2026 include mid-to-high single-digit growth in China.

Q4 Sequential Outperformance and 2026 Cadence

ITW experienced a 4% sequential revenue growth from Q3 to Q4, significantly outperforming its historical average of 2%. This broad-based improvement, with notable contributions from segments like Polymers & Fluids and Test & Measurement, suggests positive market tailwinds and strong internal execution, providing good momentum into 2026.

The company expects 2026 to unfold with typical seasonality, with Q1 organic growth positive but slightly lower than subsequent quarters, and a 47%/53% EPS split between the first and second halves.

Margin Drivers and Offsets

While enterprise initiatives are expected to contribute 100 basis points to margin expansion in 2026, the overall margin improvement is partially offset by inflation in employee-related costs, such as wages and health and welfare benefits. Additionally, strategic investments aimed at accelerating organic growth and maintaining productivity also factor into the margin profile.

The company's high incremental margins are expected to drive further margin expansion if short-cycle demand recovery materializes.

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