Illinois Tool Works Inc. (ITW) Earnings

Management highlights

- Overall Financial Performance * Delivered 4.5% total organic revenue growth in Q2 2026, with total revenue growing 6.1% year-over-year including 1.4% from foreign currency and 0.2% from an acquisition. * Operating income hit $1.15 billion, up 7.4% year-over-year, marking the most profitable quarter in ITW's history. GAAP EPS increased 10% to $2.84, and operating margin expanded 40 bps to 26.7%. * Free cash flow grew 41% year-over-year with a 77% conversion rate, and the company returned $1.2 billion to shareholders via dividends and share repurchases. * Sequential Q1 to Q2 revenue growth reached 7%, far above the historical 2% average, with operating income up 12% and operating margin expanding 130 bps sequentially. - Regional Performance * Organic growth was +6% in North America, +6% in Asia Pacific, +3% in China, and flat in Europe. - Strategic Progress * Customer-backed innovation (CBI) contributed 3% to first half 2026 revenue growth, up from 2.4% for full year 2025. Sustained 3%+ CBI contribution is the core catalyst for hitting long-term 4%+ annual organic growth targets, and the company remains on track to meet 2030 performance goals. * Enterprise efficiency initiatives contributed 120 bps to operating margin expansion in the quarter. ITW repurchased $750 million of shares (≈1% of outstanding shares) in Q2, pulling forward planned Q3 repurchases. * Price increases fully offset higher raw material costs in absolute dollar terms, but timing lags between inflation and price adjustments created a 40 bps temporary margin dilution, which management expects to recover over time.

Guidance

- Full year 2026 organic growth guidance was raised 1.5 percentage points to a 3% to 4% range (new midpoint 3.5%), marking the second upward guidance revision of the year. The updated guidance implies 4.5% organic growth in the second half of 2026. - Full year GAAP EPS guidance was raised 15 cents to a $11.35 to $11.55 range (new midpoint $11.45), representing 9% year-over-year growth. - Operating margin guidance is maintained at 26.5% to 27.5%, with enterprise initiatives still expected to contribute over 100 bps of expansion. Incremental margin for the full year is projected at 40%, with temporary price-cost lags holding back expansion that will be recovered in later quarters. - Full year free cash flow conversion is projected to exceed 100% of net income, with total share repurchases planned at approximately $1.5 billion for 2026. - The effective tax rate guidance remains unchanged at 23% to 24%. No material tariff refunds are expected, and no benefit from potential refunds is included in the updated guidance. - Management expects all seven segments to deliver positive organic growth and operating margin expansion in the full year 2026, with margin improvement for every segment in the second half. Long-term, the company remains on track to hit a 30%+ enterprise operating margin target by 2030.

Segment performance

1. Automotive OEM: Organic revenue was flat overall (North America +1%, China +1%, Europe -5%). Operating margin improved 30 bps to 21.6%. 2. Food Equipment: Organic revenue was flat overall, with +5% service growth offsetting a 2% equipment decline (an improvement from Q1's 6% equipment decline). North America organic was -4% while international delivered +6% organic growth. 3. Test and Measurement and Electronics: 10% organic growth, with electronics (40% of the segment) surging 21% driven by printed circuit board and semiconductor manufacturing end markets. Operating margin expanded 240 bps to 25.2%. Order growth outpaces revenue growth. 4. Welding: 14% organic growth (a record top line), with equipment up 19%. North America (85% of the segment) led at 19% with broad-based growth across infrastructure, energy, aerospace, and defense end markets. Operating margin held at 32.4%. Order growth outpaces revenue growth. 5. Polymers and Fluids: 7% organic growth, with automotive aftermarket +7%, polymers +7%, and fluids +8% supported by general industrial and biopharma momentum. Operating margin expanded 160 bps to a record 29.3%. 6. Construction Products: +2% organic growth (the highest rate in four years). All regions grew: North America +2%, Europe +1%, Australia/New Zealand +2%. North American commercial construction (15% of the region) grew 13%, while residential renovation grew 1%. 7. Specialty Products: Total revenue +3%, organic revenue +2%. North America grew 2% and international grew 1%, with strong growth in medical, aerospace, and consumer packaging offset by product line simplification in appliance components. Operating margin declined 110 bps due to larger-than-average price-cost timing headwinds.

Risks & headwinds

- Timing lags between raw material inflation and implemented price increases created temporary margin dilution, with residual headwinds expected to continue into Q3 before improving in Q4. The 2026 full year expected average headwind from price-cost lags is approximately 20 bps. - A storm damaged one manufacturing facility and one warehouse at ITW's Welding segment facilities in Appleton, Wisconsin. Management noted all employees are safe, and contingency plans are being executed to minimize customer disruption, with no material impact to full year 2026 guidance expected. - Persistent broad-based inflation across resin, chemicals, transportation, and electronic components creates ongoing near-term pricing and margin pressure, though management notes ITW's decentralized structure and product differentiation supports successful long-term navigation of this environment.

Analyst Q&A

• Q: Andy Kaplowitz (Citigroup) asked about the durability of the strong growth in ITW's CapEx-focused segments, noting that orders are outpacing revenues. He also asked whether 3% first-half CBI growth is sustainable, and if CBI contributions can increase further going forward.

  A: Management confirmed that while ITW does not typically carry large backlogs, backlog in welding and test & measurement/electronics is higher than normal, and stronger order activity supports confidence in sustained growth through the second half. Management added that the CBI 3% contribution is ahead of earlier projections, but the progress is sustainable, as the company has systematically codified its CBI framework and invested in capability similar to the successful 80-20 initiative from 10+ years prior. CBI contribution is expected to increase across all segments in 2026 and beyond.

• Q: Tammy Zakaria (JP Morgan) asked about near-term sequential growth trends across segments, and which segments offer the most outsized margin growth potential en route to the 2030 30% enterprise margin target.

  A: Management confirmed that acceleration in top-line growth continued through Q2, with April off to a strong start, May holding that trend, and June performance even stronger, with Q3 off to a good start aligned with new guidance. Management noted every segment will continue to improve margins toward or above 30% over time: automotive OEM is approaching its low-mid 20s target, test and measurement has clear room for further expansion after this quarter's 240 bps improvement, food equipment and polymers and fluids are on track to hit 30%+ over time, and current high-margin segments will continue expanding. CBI products launch at higher margins, supporting incremental margin expansion long-term.

• Q: Jamie Cook (Truist) asked why operating margin guidance was not raised alongside organic growth guidance, and what drove the 110 bps margin decline in Specialty Products in Q2.

  A: Management explained that the unchanged full-year margin guidance reflects temporary price-cost timing lags that created a 40 bps headwind in Q2; without these lags, guidance would have been raised toward the high end of the existing range. Lags will persist partially into Q3, with significant improvement expected in Q4. The large margin headwind in Q2 was concentrated in Specialty Products (and to a lesser extent automotive OEM), where price increases take longer to implement, and margins are expected to improve in the second half and into 2027. Incremental margins would be in the mid-high 40% range for 2026 without the temporary headwind, compared to the guided 40%.

• Q: Andrew Obin (Bank of America) asked about how ITW is managing persistent inflation, and what is driving the stronger-than-expected growth in the North American Welding segment.

  A: Management noted the key near-term inflation pressures are crude oil derivatives (resin/chemicals), freight/logistics, and electronic components. ITW's primary levers are proactive price adjustments, strategic sourcing, and ongoing productivity improvements as part of the company's enterprise initiatives, and all known inflation is already incorporated into 2026 guidance. Management added that Welding growth was not a surprise, with momentum building since late 2025, driven by broad-based demand across energy, infrastructure, aerospace, and data center construction end markets, alongside strong adoption of newly launched innovative products that have driven share gains.