Illinois Tool Works (ITW) Q3 2026 earnings review
Illinois Tool Works equipment sales jump, but three divisions shrink
Illinois Tool Works, the maker of industrial welding gear, commercial kitchen equipment and car parts, is riding a surge in factory equipment demand while three other divisions shrink. Sales from businesses owned a year ago rose 4%, or about 5% excluding a $40 million tornado hit to two welding plants, led by a 16% jump in Test & Measurement and Electronics. Chief executive Christopher A. O'Herlihy raised the full-year profit outlook slightly after price increases beat raw material inflation and lifted operating margin to a record.
| Sales from businesses owned a year ago | +3.8% or ~5% excluding a $40M tornado hit |
|---|---|
| Operating margin | 27.8% +0.4 percentage points from a year ago |
| GAAP profit per share | $3.00 +6.8% from a year ago |
| Full-year profit per share outlook | Raised $0.05 middle of the range: $11.50 (+10%) |
⚖️ Verdict: 🟢 Bullish
The story got better because the earlier order backlog in electronics and welding turned into double-digit sales growth, and price increases stopped dragging on profit margins. The bad news: three of the seven divisions — Automotive OEM, Construction Products and Specialty Products — shrank and lost margin in the quarter, putting management's pledge that every division will grow this year out of reach.
The question now is whether the equipment boom is the start of a multi-year factory upgrade cycle or a brief restock that fades as car and construction demand weakens. If it is a lasting cycle, underlying sales will accelerate above 5% in the fourth quarter as the tornado disruption clears; if it is a brief restock, equipment growth will cool while the lagging divisions stay negative. Fourth-quarter sales and order commentary will tell.
🐂 Bull Case
Equipment and Chemical Units Carry the Growth
Illinois Tool Works makes industrial equipment, specialty chemicals and fasteners across seven divisions. For the past two quarters, management said customer orders were running ahead of sales in its factory-equipment units. In the third quarter, those orders turned into sales, led by 6.0% growth in North America from businesses owned a year ago.
- Test & Measurement and Electronics: underlying sales up 15.8%, up from 10.0% in the second quarter
- Polymers & Fluids (industrial adhesives, sealants and fluids): underlying sales up 8.2%, up from 7.3% last quarter
- Welding: underlying sales up 6.9% as reported, or about 15% excluding a $40 million tornado disruption
This matters because those three divisions generate 43% of total sales and carry higher profit margins than the company average. Their expansion lifted operating profit in all three units by more than 2.8 percentage points of sales. That strength allowed the manufacturer to keep its full-year underlying sales target of 3% to 4% despite the factory damage.
What to watch: fourth-quarter underlying sales growth, which needs to reach 5.3% by our math to hit the middle of the full-year plan. A reading at that level would show that equipment demand is holding up as the tornado disruption clears.
Price Increases Now Beat Raw Material Costs
During the first half of the year, rising raw material costs hit Illinois Tool Works before its own price increases took effect, cutting second-quarter operating margin by 0.4 percentage points. In the third quarter, the industrial group said that "price increases and other actions more than offset rising raw material costs, resulting in a favorable impact on both operating income and margin".
Operating margin rose 0.4 percentage points from a year ago to 27.8%, while internal cost-cutting projects — which the company calls enterprise initiatives — added 1.3 percentage points. By our math, the cost of making products fell by 0.6 percentage points of revenue to 54.9%, while selling, administrative and research expenses rose 0.3 points to 16.9%. Even so, variable production and overhead costs still trimmed 0.6 points from the margin.
What to watch: the exact price-versus-cost figure in the quarterly filing's margin table. A positive number in that table would confirm that pricing has caught up with inflation not just in dollars, but as a share of sales.
Positives this quarter didn't test
One standing growth driver was highlighted by chief executive Christopher A. O'Herlihy in the release without an updated figure.
- Customer-Back Innovation (sales from new products developed from customer problems): O'Herlihy cited a "meaningful increase" in its contribution toward the 3%-plus goal, after it reached 3.0% in the first half; the exact third-quarter percentage was not in the release and would need to appear on the call or at year-end to confirm whether it stayed above 3%.
🐻 Bear Case
Three of Seven Divisions Shrank in Q3
Last quarter, management told investors that all seven divisions would grow underlying sales and expand operating margins for the full year. In the third quarter, O'Herlihy highlighted "accelerating demand in our capex-related segments" and "continued strength in Polymers & Fluids segment", while Food Equipment turned slightly positive with 0.5% underlying sales growth and a 0.6-point margin gain to 29.8%.
- Automotive OEM (car parts for manufacturers): underlying sales down 2.1%, operating margin down 1.7 percentage points to 20.1%
- Specialty Products (packaging and consumer equipment): underlying sales down 1.2%, margin down 0.9 points to 31.4%
- Construction Products (fasteners and tools for building): underlying sales down 0.8%, margin down 1.7 points to 29.9%
Those three divisions represent 41% of revenue, and each one lost ground in the third quarter. Through the first nine months of the year, underlying sales remain negative in Automotive OEM, Food Equipment and Specialty Products, and nine-month operating margins are down in Food Equipment, Construction Products and Specialty Products. That leaves the company short of its pledge that every division will grow both sales and margins this year.
What to watch: fourth-quarter underlying sales in Automotive OEM, Food Equipment and Specialty Products. Each division would need to erase its nine-month deficit of 0.7% to 1.4% in a single quarter to meet management's full-year claim.
Cash Flow Still Trails the Full-Year Target
Illinois Tool Works plans for free cash flow — cash from operations minus factory equipment spending — to equal about 100% of net profit this year, after falling short at 82% in 2024 and 88% in 2025. In the third quarter, free cash flow fell 5.9% from a year ago to $851 million, which equalled 100% of the quarter's net profit, down from 110% a year earlier.
Notice that the full-year target quietly softened from "greater than 100 percent" in the first half to "approximately 100 percent" this quarter. Through nine months, free cash flow of $2,010 million is only 82% of net profit because faster equipment sales tied up cash in unpaid customer bills and inventory. By our math, hitting 100% for the full year requires fourth-quarter cash conversion near 150%, well above the 109% achieved in the fourth quarter of 2025.
What to watch: fourth-quarter free cash flow conversion. A result below 140% would leave the manufacturer short of its initial 100% target for a third straight year.
Risks this quarter didn't answer
Five standing concerns could not be tested from the earnings release alone.
- Cycle durability in equipment units: Test & Measurement and Electronics and Welding grew rapidly, but only 2027 order rates will show whether this is a multi-year boom or a normal inventory restock.
- Size of the semiconductor business: the release gives no dollar sales or profit figure for electronics assembly or chip-equipment parts; the quarterly filing will show sub-segment growth rates.
- European demand: the release mentions 6.0% underlying growth in North America but omits Europe and China; the filing's geographic table will show whether Europe shrank.
- Automotive OEM vs global car production: underlying auto sales fell 2.1%, and the filing or call will show whether that beat global car production by the planned 2 to 3 percentage points.
- Debt refinancing costs: short-term debt fell by $926 million from last quarter to $2,219 million while long-term debt rose by $604 million to $7,153 million; the filing's debt footnote will show the interest rates on the new borrowing.
👓 Other Themes
Tornado Damage Cut Welding Sales by $40 Million
Late July tornado damage at two Welding factories cut third-quarter revenue by about $40 million. Without that disruption, the company said "the Welding organic revenue growth rate would have been approximately 15 percent, resulting in total company organic growth of approximately 5 percent" instead of 3.8%. The lost profit was "largely offset by business interruption insurance", which lifted Welding operating margin to 36.3%, and future effects should be immaterial.
💲 Other KPIs
Working capital grew faster than sales as equipment divisions expanded. Trade receivables — bills customers have not yet paid — rose 8.0% from a year ago to $3,516 million, and inventories rose 5.7% to $1,823 million, against revenue growth of 4.4%. That cash tie-up explains why third-quarter operating cash flow fell 6.7% to $953 million.
The average diluted share count fell 2.2% from a year ago, turning 4.1% net profit growth into 6.8% earnings per share growth. After pulling buybacks forward to spend $750 million in the second quarter, the company bought back $187 million in the third quarter and raised its quarterly dividend by 7%.
Total debt of $9,372 million minus $809 million of cash sits 6.8% higher than a year ago by our math, because first-half dividends and buybacks exceeded cash flow. However, net debt fell by $292 million from the second quarter as the buyback pace slowed, and management shifted $604 million of debt into long-term borrowings.
🔮 Guidance
Raised. Management lifted the bottom of the range by $0.10, moving the middle up $0.05 to $11.50, or about 10% growth for the year. By our math, that leaves $3.01 per share for the fourth quarter, up 10.7% from a year ago. This is the third raise of 2026, though the smallest: +$0.10, +$0.15, and +$0.05.
Raised. The full-year sales forecast moved up 0.5 percentage points at both ends to 5.0% at the middle of the range, helped by foreign currency rates. By our math, that points to 4.9% sales growth in the fourth quarter, up from 4.4% in the third quarter. It is the second raise this year after +1.5 points last quarter.
Unchanged. Management kept the full-year underlying sales target at 3.5% in the middle of the range, absorbing the $40 million third-quarter tornado loss. Because underlying sales grew 2.9% over the first nine months, hitting the middle of the full-year plan requires about 5.3% growth in the fourth quarter by our math.
Unchanged. The full-year operating margin plan stays at 27.0% in the middle of the range, with internal cost projects adding more than 1.0 percentage point. With the nine-month margin at 26.6%, reaching the 27.0% middle requires a 28.1% operating margin in the fourth quarter by our math, up from 26.5% in last year's fourth quarter.
Cut. The release now projects free cash flow at "approximately 100 percent of net income", stepping down from "greater than 100 percent" in the first two quarters. With nine-month conversion at 82%, reaching 100% for the year requires fourth-quarter conversion of about 150% by our math, after full-year results of 82% in 2024 and 88% in 2025.
Unchanged. Illinois Tool Works still plans to buy back about $1.5 billion of its shares this year. Having spent $1,312 million across the first three quarters, that leaves about $188 million for the fourth quarter by our math, matching the third quarter's $187 million pace.
Unchanged. The full-year tax rate forecast remains at 23.0% to 24.0%. Through nine months, the reported tax rate is 23.3% (or 24.3% excluding a $34 million first-quarter tax audit benefit), after a 24.4% rate in the third quarter.
❓ Key Questions
How large are semiconductor and electronics assembly sales in dollars?
Test & Measurement and Electronics underlying sales jumped 15.8% in the third quarter, the fastest rate in the company. Without a dollar revenue base or margin for the chip-related lines inside that division, investors cannot judge how much of the group's profit relies on the semiconductor cycle.
Did orders again outpace sales in Welding and Electronics?
For the prior three quarters, management said customer orders ran ahead of shipments in both equipment divisions, building an above-normal backlog. Knowing whether orders stayed ahead of the third quarter's 15%-plus shipment pace will tell whether growth slows in early 2027.
Why did Automotive OEM underlying sales drop 2.1%?
Management committed to beating global car production by 2 to 3 percentage points this year, assuming global builds fall 2%. With third-quarter underlying auto sales down 2.1% and margin down 1.7 points, investors need the regional breakdown in Europe and China to see if the unit is losing share.
What gives confidence in a 150% Q4 cash conversion rate?
Nine-month free cash flow conversion sits at 82% of net profit because receivables rose $289 million since year-end. Hitting the ~100% full-year target requires fourth-quarter conversion near 150% by our math, a level the business did not reach in 2024 or 2025.