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.