Good morning. My name is Connor Meek, and I will be your conference operator today. At this time, I would like to welcome everyone to ITW's third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question- and- answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you'd like to withdraw your question, please press the star followed by number one key again. For those participating in the Q&A, you will have the opportunity to ask one question, and if needed, one follow-up question. Thank you. Erin Linnihan, Vice President of Investor Relations, you may begin your conference.
Senior Vice President and CFO, Michael Larsen. During today's call, we will discuss ITW's third quarter 2026 financial results and provide guidance for full- year 2026. Slide two is a reminder that this presentation contains forward-looking statements. Please refer to the company's 2025 Form 10-K and subsequent reports filed with the SEC for more detail about important risks that could cause actual results to differ materially from our expectations. This presentation uses certain non-GAAP measures, and a reconciliation of those measures to the most directly comparable GAAP measures is contained in the press release. Please turn to slide three, and it's now my pleasure to turn the call over to our President and CEO, Chris O'Herlihy. Chris?
Thank you, Erin, and good morning, everyone. As you saw in our press release this morning, the ITW team delivered another quarter of strong operational and financial performance. Our third quarter highlights include organic growth of 4%, or 5% excluding the impact of a tornado event at one of our Welding locations. Our top- line was fueled by another meaningful increase in Customer-Back Innovation, and we are raising our full- year CBI projection to 3%+ . Operating margin expanded 40 basis points to 27.8%, and operating income increased 6%, marking a new quarterly record for ITW. GAAP EPS exceeded our estimate and increased 7% to $3. Demand momentum this quarter continued to accelerate in our two CapEx related segments. There were organic growth of 16% in Test & Measurement and Electronics and 7% in Welding, or 15% excluding the tornado event.
In addition, Polymers & Fluids grew 8% due to robust contributions from both market share gains and new products. Beyond capitalizing on favorable market conditions, we continue to make meaningful progress on our long-term organic growth agenda across all segments. On that note, I am very encouraged by our Customer-Back Innovation progress, which so far this year has contributed more than 3% to revenue growth compared to 2.4% in 2025. As I mentioned, we are now projecting that CBI will exceed 3% for the full- year, which is the single biggest catalyst for achieving our enterprise goal of sustained high-quality organic growth of 4% or higher. Our performance year- to- date offers another proof point that disciplined execution on our next phase enterprise strategy priorities is yielding strong results, positioning us very well for 2027 and putting us firmly on track to achieve our 2030 performance goals.
Before I transition to the bottom- line, let me spend just a minute on the unfortunate tornado event that we mentioned on our call in July, which damaged two of our Welding facilities and reduced our revenues by about $40 million, or 1 percentage point in the third quarter. I am pleased to say that our colleagues were all safe, and the team did an outstanding job, quickly and safely restoring operations and taking care of customers. Our swift recovery serves as a great demonstration of our ability to read and react, a key proof point of the value of ITW's decentralized entrepreneurial culture. With Welding order growth running well ahead of revenue, we expect Welding to return to strong growth again in the fourth quarter and carry good momentum into next year.
On the bottom- line, the ITW team continued to execute at a high level, with enterprise initiatives contributing 130 basis points to our operating margin. In a very dynamic inflationary environment, our teams continue to respond decisively and effectively. Overall, price cost was favorable in the third quarter. As you can see, in a few segments such as Automotive OEM and Construction Products, we have some catching up to do. Turning to capital allocation, in the quarter, we raised our dividend 7%, marking our 63rd consecutive year of dividend increases. In the first three quarters of the year, we have returned $2.7 billion to shareholders through share repurchases and dividends. In terms of our outlook, we are raising our full- year GAAP EPS guidance by $0.05 to a new midpoint of $11.50, reflecting 10% year-over-year growth. This marks our third guidance increase of the year.
Looking ahead to 2027, and with the caveat that we haven't developed our annual plans yet, demand momentum continues to build across several of our end markets, notably in Welding and Test & Measurement and Electronics. In addition, we are exiting this year with CBI already at 3%+. We would expect another meaningful contribution from our enterprise initiatives and incremental margins in the 40%+ range. Our long-term performance framework, 4%+ organic growth and 30% operating margins by 2030, is very much intact and remains well within our reach. In conclusion, I want to thank our dedicated ITW colleagues around the world. This quarter, in particular, the Welding folks in Appleton, Wisconsin, for their dedication to serving our customers and executing our strategy with excellence. With that, I'd hand the call over to Michael to walk you through the segment details and updated full-year outlook. Michael.
Thank you, Chris, and good morning, everyone. Starting with the top- line, total revenue grew 4.4%, driven by 3.8% organic growth, a 0.3% contribution from foreign currency translation, and 0.3% from an acquisition. Excluding the tornado event in Welding, our organic growth rate would have been approximately 4.8%. Importantly, order growth continued to accelerate in both Welding and Test & Measurement and Electronics, and demand remained strong in Polymers & Fluids. Moving to the bottom- line, operating margin expanded by 40 basis points year-over-year to 27.8%, with another solid 130 basis points contribution from enterprise initiatives. Sequentially, margins improved 110 basis points from Q2. In the quarter, price increases and other actions offset higher raw material costs in dollar and margin terms. Those favorable drivers were partially offset by inflation in other areas, such as employee-related costs. Free cash flow was $851 million, or 100% of net income.
On a year-to-date basis, free cash flow grew 9% to more than $2 billion or 82% of net income. Finally, GAAP EPS was $3, an increase of 7%, despite a headwind of about $0.10 from a higher tax rate of 24.4% compared to 21.8% last year. Overall, a strong quarter operationally and financially, and with significant positive momentum going forward. Turning to slide four, from a regional perspective, organic growth was up 6% in our largest region, North America. Asia Pacific was up 3%, with China down 2%, primarily due to a tough comparison of +10%, and Europe was flat. Moving to the segment highlights, starting with Automotive OEM, organic revenue was down 2% against a tough comparison last year of +5%. In Q3, North America was down 1%, Europe down 7%, and China was down 1%.
In the quarter, we meaningfully outperformed build rates in both North America and China, while Europe was impacted by unfavorable customer mix and product line simplification. For the full- year, we expect to outperform builds and remain well-positioned to continue to execute on our long-term growth opportunities, such as EV growth in China. Operating margin was down 170 basis points, primarily due to resin inflation and the resulting price cost timing lag, which was partially offset by favorable enterprise initiatives. As usual, we expect to recover the price cost impact over time, helped by new product launches, and we remain on track to achieve our longer-term margin targets for the segment. Turning to slide five, Food Equipment organic revenue grew 1% overall as service strength of +5% helped offset a 2% decline in equipment, which marked a notable sequential improvement from the mid-single-digit equipment declines in the first half.
Regionally, North America was down 3% due to soft but sequentially improving institutional demand in areas such as K-12 , which are impacted by a decline in funding levels, partially offset by high- single-digit growth in areas such as retail. On a positive note, international again delivered strong growth, up 5% in the quarter. Operating margin improved 60 basis points to 29.8%. Looking ahead, with North America orders up mid-single- digits this quarter, we are now projecting year-over-year organic growth in the low- single- digits and operating margin expansion in Q4. Test & Measurement and Electronics had another outstanding quarter, with 16% organic growth, led by a 31% surge in electronics, which represents approximately 40% of this segment. Test & Measurement was up 8%, driven primarily by semiconductor demand, with general industrial order activity also beginning to pick up.
The two main drivers of the strong growth that we're seeing in this segment are, first, our electronic assembly businesses, which serve the printed circuit board industry, and second, our semiconductor-related businesses, which serve the chip manufacturing industry. Staying invested in our strategic growth initiatives in those businesses through the cycle has positioned us to take full advantage of the significant growth opportunities that remain ahead as orders continue to outpace revenue growth by a wide margin. Operating margin expanded by 330 basis points to 28.7%, primarily as a result of strong operating leverage. Moving on to slide six, Welding was obviously impacted by the tornado event in the quarter, but still managed to deliver remarkably resilient top- and bottom-line results, including 7% organic growth, which would have been 15% excluding the tornado event.
Equipment revenue grew 5% as orders continued to surge across most end markets, and consumables grew double- digits, driven by both market tailwinds and strong new product adoption. North America, which represents 85% of the Welding segment, was up 8% with broad-based growth across both industrial and commercial markets as demand momentum continued to strengthen in end markets such as infrastructure, energy, aerospace, defense, and semiconductors. On the bottom- line, the loss of operating income associated with the tornado event was offset by business interruption insurance, which favorably impacted margins. Looking ahead, we expect Welding margins to return to their typical best-in-class levels. In Polymers & Fluids, organic growth reached 8%, driven by strength across most end markets, with strong traction on CBI and continued market share gains.
Organic growth was 6% in automotive aftermarket, while organic growth of 12% in polymers and 9% in fluids was supported by robust momentum in general industrial and biopharma markets. Operating margin expanded 280 basis points to 31.3%. Turning to slide seven. In our most interest rate-sensitive segment, Construction Products, organic growth was down 1% compared to end markets, which we estimate were down in the mid-single- digits. North America was flat, Europe was down 2%, and Australia and New Zealand was up 1%. While residential renovation in North America was down 2%, commercial construction, which represents about 15% of the region, was up 19% due to strong demand in areas such as data center construction. Operating margin was down 170 basis points to 29.9%, due primarily to near-term price-cost headwinds.
Specialty Products organic growth was down 1%, which includes the impact of 130 basis points of product line simplification, primarily in the appliance components business. North America grew 3% on solid demand for consumer packaging, offset by an 8% decline in international markets, which had a tough comparison of 7%. Operating margin was down 90 basis points to 31.4%. With that, let's turn to our slide eight for an update on our full-year guidance. Overall, we are carrying significant positive momentum forward and are well-positioned to continue to deliver strong operational and financial performance in the fourth quarter and beyond. Starting with the top- line, per our usual process, our guidance is based on current levels of demand, adjusted for typical seasonality and prevailing foreign exchange rates.
As a result, our organic growth projection remains 3%-4% for the full- year, despite the Q3 tornado event, which implies organic growth of 5%+ in Q4. Sequentially, revenues grow 1%-2% from Q3, despite two fewer shipping days in Q4. We're raising total revenue growth guidance by 50 basis points to 4.5%-5.5% to account for current foreign exchange rates. On the bottom- line, our operating margin guidance remains unchanged at 26.5%-27.5%, and we expect Q4 margins in the mid- to high- 27s, similar to Q3, which would mark a significant improvement year-over-year. Enterprise initiatives remain the primary margin driver and are expected to contribute more than 100 basis points. For the full- year, we're estimating that price cost will be favorable on an income basis and about neutral to margins in what remains a very dynamic environment.
Factoring in our strong third quarter results, we are raising our GAAP EPS guidance by $0.05 to a narrowed range of $11.45 to $11.55, with a new midpoint of $11.50, representing 10% year-over-year growth. The projected effective tax rate remains unchanged at 23%-24%. Free cash flow conversion is projected to be approximately 100% of net income, with full-year share repurchases of approximately $1.5 billion. Considering some of the unique challenges we had to deal with this quarter, we are pleased with our performance and especially the strong momentum across the company. Combined with our best-in-class margins and our disciplined operational execution, we remain well-positioned to deliver differentiated financial performance in 2026 and beyond. With that, I will turn the call back over to Erin.
Thank you, Michael. Connor, will you please open the queue for questions?
At this time, I would like to remind everyone, to ask a question, press star, then the number one on your telephone keypad. We will pause just for a moment to compile the Q&A roster. Your first question comes from the line of Jamie Cook with Truist Securities. Jamie.
Hi, good morning.
Your line is now open. Please go ahead.
Morning, Jamie.
Good morning.
Hey, good morning. I guess two questions. First, just on the price cost in the quarter, I think originally you had said you expected a headwind of 30 basis points, and it sounds like it was better than that. Just if you could quantify that. Then I guess my second question, it sounds like there are opportunities within Automotive OEM and Construction Products for margins to improve. It sounds like there is a pricing lag there. Can you talk to what pricing actions that you are taking and when we should see that start to hit the bottom- line?
Yeah. Let's start with the price cost. If we look back to Q3, our pricing actions largely came through as planned. Like everyone else, we continue to see a lot of inflation in raw material costs such as resin, chemicals, steel, electronic components, in that 4%-5% range. Price cost was modestly favorable in the third quarter. Given the dynamic environment, we do not really want to provide a whole lot more detail than that. What we can say is that for the full- year, we also expect the margin impact to be about neutral for the full- year. Just given the very dynamic conditions here, we are going to refrain from providing more detail on Q3 and Q4 and quantifying specifically the basis points.
Now, looking ahead to 2027, what we have talked about in the past is still the case, that we expect conditions to normalize here in 2027, which typically is a 10 basis points to 20 basis points tailwind to margins from price cost. That is kind of the base assumption for 2027. So a little bit of near- term headwind, and we expect to get through that over the next, by year- end and next year then would be a more normal environment. Then maybe on the Automotive OEM margins, Chris, if you wanted to comment.
Yeah. I would say in both auto and construction, we are busily recovering price right now. I think in both cases, we think about margins across all seven segments, but particularly if we talk about Auto for a second, the primary drivers of auto margins are enterprise initiatives and higher margin innovation. We are making great progress on those both in auto and construction. We see those sustaining into next year.
Okay. Sorry, and one follow-up. Obviously, Chris, congratulations. It seems like we are getting some good traction on CBI. It is trending ahead of your expectations. Besides auto, where are you seeing the biggest benefits, and should we assume that momentum continues to improve into 2027? Thank you.
Yeah, you should assume it continues to improve. What I would say is that, just to refresh in terms of how we think about this, what's captured in our CBI number is incremental revenue growth over a three-year period, net of cannibalization. On that basis, you need to keep refilling the pipeline with new projects. It can be a little lumpy from quarter to quarter, but what's evident is that the work that we've done over the past two, three years have really resulted in this step change from what was 1% five years ago, to 2% two years ago, to a 3% contribution level right now. We would expect, given the improvements in innovation practice across the company, as you surmised, this number to incrementally improve from here on a year-over-year basis going forward.
As we've said, the most actionable and sustainable way that we drive organic growth over the long term is CBI. We're pretty encouraged what this means for organic growth.
Thank you.
The next question is from Andy Kaplowitz of Citigroup. Your line is open. Please go ahead.
Hey, good morning, everyone.
Hi, Andy.
Morning.
Question, Michael. I know you generally have short cycle businesses, but you obviously went 2026 with relatively strong organic revenue growth. I would imagine you have some backlog in your CapEx-focused businesses now. How does that position you when you think about 2027? Chris, I think you sounded pretty confident regarding meeting or beating that 4% or better algorithm that you have. Maybe you can elaborate on any puts and takes. I know you talked about CBI to Jamie, but anything else, and maybe elaborate on if you do have backlog in these CapEx businesses.
We do have a little bit more backlog than usual. We are talking about months, not years of backlog. Just as a reminder, we are still very much a short cycle business. Part of that is because of our 80/20 operating system, which allows us to take orders today, ship them tomorrow, and then replenish the inventory the next day. There is no incentive for customers to place orders significantly ahead of when they need them. That said, obviously with what we have seen on the CapEx side of the business, particularly in Welding and Test & Measurement and Electronics, we are carrying a little bit more backlog than usual. We actually saw, to complete the picture, there is a little bit of a backlog increase also in the Food Equipment business here going into the fourth quarter.
All of that bodes really well for this 5%+ organic growth number that is implied in our guidance for 2026. Maybe more importantly, as we go into 2027, not so much the backlog, but just the underlying momentum that we are seeing in these businesses, the feedback we are getting from customers, the new products that are coming through at significantly higher margins now, as Chris said, at a 3% + CBI contribution. 3% + in the segments we just talked about, Welding and Test & Measurement, you could surmise that it is significantly higher than 3% in those segments. So those really have a lot of momentum going into 2027.
Yeah, I would just add to that, Andy, that as Michael indicated, strong order intake, higher than revenue growth for both Test & Measurement and Welding in the quarter. What is also encouraging is that for Welding and Test & Measurement, the growth is pretty broad based. Think about Welding, very strong growth, not just on the industrial side in areas like energy, aerospace, construction, fabrication, and so on, but also on the commercial side on small fab. Similarly with Test & Measurement, obviously semi has been strong for a little while now, but we are now starting to see a real nice pickup on the industrial side of the business as well in areas like Instron.
Even though we do not forecast cycles, I would certainly say that the current order activity and the feedback, to Michael's point, that we are getting from our customers gives us some good confidence going into 2027.
Thanks for that, guys. Then I think 8% organic growth in Polymers & Fluids is the strongest growth you have had in the last few years in that segment. I know you mentioned market share gains, strength in general industrial and biopharma, but maybe you give us a little more color on the sustainability of that growth for that segment.
Sure. Polymers and Fluids has been building for a little while now and certainly some gains, but also I think some real nice progress on CBI, above average contribution CBI in that segment. Broad-based across all three platforms of automotive aftermarket, Polymers & Fluids. I would say Polymers in particular, really well positioned in very high growth markets, pretty sophisticated, ease of bonding applications, things like electronics, electric vehicles. Then similarly on the fluids business, we are having some real nice success on the biopharma space. I think what this all says, Andy, is that it really highlights the fact that this segment is really well positioned to be a 4%+ grower for the enterprise on a sustained basis going forward.
I would just add, Andy, as you think about this from a modeling standpoint, the comparison does get quite a bit tougher here in the fourth quarter. Q4 last year, as Chris said, this has been going on for a while. The segment was up 5% organic, so the Q4 growth rate might not be starting with an 8%, is kind of what I am trying to tell you here.
Got it. Appreciate all the color, guys.
Sure.
Thanks, Andy.
The next question is from the line of Julian Mitchell with JPMorgan. Your line is open. Please go ahead.
Hi, this is [Piyush] on for Julian. Thanks for taking the question. Maybe first on Welding. You guys noted associated loss of operating income was largely offset by business interruption insurance. So what is the underlying margins in Welding in Q3, and what should we expect in Q4?
Yeah, I think what I said in the prepared remarks was that we would expect to return to kind of our typical best-in-class margins in that 32%-34% range.
Oh, okay, got it. Maybe sticking one more on margins. On the Polymers & Fluids margins are very strong. Anything one time here now into the 30s, can they stay here or maybe push up? Any color here?
Yeah, I think like I just said to Andy, I think we're probably expecting a little less operating leverage here in the fourth quarter, so maybe a little bit lower than what we put up here in the third quarter, which I believe was a record for the segment, by the way.
Still very healthy.
Yeah, still very healthy. Yeah.
Got it. Thank you.
Sure.
The next question is from the line of Steven Fisher with UBS. Your line is open. Please go ahead.
Thanks. Good morning.
Good morning.
You mentioned, Michael, that Construction Products is the market with the biggest interest rate sensitivity, which makes sense given the housing relevance there. I am wondering, are there any areas within your own business or products that are more affected by financing costs? Thinking like large commercial dishwashers, et cetera, that might be financed. Are you seeing any impact from higher interest rates or hearing any anecdotes on that from your various businesses?
Not specific to Food Equipment, which I think is your question. I think if you just look at the portfolio, it is pretty easy to see that the growth is really driven by the more industrial businesses, the CapEx-related businesses, as well as Polymers & Fluids. There is a fair bit of underlying industrial demand in that business. Then there is a little bit more challenge in the more consumer-oriented, kind of interest rate sensitive parts of the company, which would be Construction Products, maybe to some extent also the Automotive OEM business. But really, I think Construction Products and Automotive OEM are the ones we would consider the most interest rate sensitive.
I think it is really encouraging when you look at the Automotive OEM business here in the third quarter, that in North America, we significantly outperformed builds, and the same is true in China by about 5 basis points, 5 percentage points in both cases. So there is room for opportunities for growth here with select customers and as a result of really driving CBI and new products in this segment. Then the challenge was really mostly on the European side, but that was kind of a unique situation related to PLS and customer mix. But that is really how we would think about it.
Okay. That is helpful. Then just maybe from a geographic perspective, just love to gauge your sense of momentum or relative optimism or pessimism. I am noticing that Europe is flat. See North America growing nicely. Just kind of curious if you have any feeling of whether Europe can hold flat. If it does not, are you assuming that North America will accelerate? Just curious for sort of any momentum and expectation commentary around geographies.
Yeah, I think, Steve, what is very clear is North America is the fastest growing region. Like I said, up 6% here in the third quarter. We do expect that momentum to continue and maybe even build a little bit here in Q4. Then when we do the plans for next year, we will have a better feel for that. But a lot of positive momentum in North America, particularly Test & Measurement and Electronics, Welding, Polymers & Fluids, kind of the usual suspects are driving a lot of the growth there. We expect that to continue in the fourth quarter. Europe, it is tough to be super optimistic about Europe. About flat here in Q3. Could be a little bit better in the fourth quarter, tied to Automotive OEM, Test & Measurement and Electronics, but not expecting a lot of improvement in that geography.
China, after years of double-digit growth, and I think last year up 9%, I think the growth there, as you would expect, has maybe slowed down a little bit. We are still in the flat kind of China, maybe down low- single- digits in Q3 and Q4. But a lot of potential going forward in that geography. Maybe that is how we would handicap it by region.
Very helpful. Thank you.
The one bright spot we have in Europe is Food Equipment, probably.
That is true. I think that is a really good point. Food Equipment up mid-single- digits, like I said, in Europe, both on the equipment as well as on the service side. That is a real strength for the company.
Great. Thank you.
Yeah.
The next question is from Nicole DeBlase of Deutsche Bank. Your line is open. Please go ahead.
Nicole?
Oh, sorry, guys, I was on mute. Can you hear me now?
Yes. We got you.
Okay. Appreciate that. Thank you for the question. I just wanted to hit on margins a little bit more. You guys said expect flat margins sequentially in the fourth quarter, but we know that that Welding insurance gain goes away. You talked about Polymers & Fluids probably seeing a bit of sequential decline. What is then getting you back to flat? Are you expecting Q-on-Q margin expansion across the rest of the businesses, and were there any tariff refunds in the margins this quarter?
I think really, if you look at the Q4 margins, I think what you're hinting at is the fact that margins typically go down from Q3 to Q4. The reason that we don't think that's the case is based on current run- rates, we actually expect revenues to go up sequentially from Q3 to Q4. We said between 1% and 2% growth sequentially, which gets us to that 5%+ organic revenue growth in the fourth quarter. Beyond that operating leverage that comes with that, everything else is pretty much the same in terms of the biggest structural driver of margin improvement remains the enterprise initiatives, which just contributed 130 basis points. We expect another 100 basis points there. Volume leverage was favorable in Q3. Like I said, we expect that to be more favorable in Q4.
We're being a little cautious around price cost, just given how quickly those can move around. But overall, we're pretty confident that we'll be able to improve margins here in the fourth quarter on a year-over-year basis, and then sequentially about the same, which bucks kind of the typical seasonality.
Okay. Thank you. That's really helpful. Then just as a follow-up, the 31% organic growth in Electronics, pretty stunning. What is your thoughts on the sustainability of that magnitude of growth in the fourth quarter and perhaps into 2027 as well?
Yeah. Nicole, we believe it's very sustainable based on the strong order activity that we're seeing from our semi and electronics customers. These customers are working very hard to increase fab capacity, produce printed circuit boards, and meet the growing needs of AI. Very sustainable, very encouraging. This is an area where we've invested in considerably over the last number of years, so we're now very well positioned to completely capitalize on that. It's also a great opportunity for us to innovate for us. Given the strong competitive advantages that we have as it relates to semi manufacturing, testing equipment particularly, we're really well positioned here to take share as the end markets continue to improve.
Thank you. I'll pass it on.
Thank you.
Thanks, Nicole.
As there are no more questions at this time, we would like to thank you for participating in today's conference call. All lines may now disconnect.