Illinois Tool Works Q3 2026: EPS +7% to $3.00, about 10% excluding a prior-year tax benefit

Illinois Tool Works (ITW), the Chicago-area maker of welding gear, auto components, commercial kitchen equipment, sealants and dozens of other industrial products, grew third-quarter 2026 revenue 4.4% to $4.24 billion and diluted earnings per share (EPS) 6.8% to $3.00. Growth again came from the businesses that sell equipment to factories: Test & Measurement and Electronics grew 15.8% organically and Welding 6.9%, the latter despite a tornado that hit two of its plants. Management raised its full-year EPS guidance for the second quarter running.

This analysis is based on the earnings release (Exhibit 99.1 to the 8-K filed October 27, 2026). The full 10-Q has not been filed yet, so the regional and product-line detail ITW normally gives per segment (for example North American vs international sales) is not available here.

Results in figures

"Organic" growth strips out currency moves and acquisitions, so it shows how much more the existing businesses actually sold. Operating margin is the share of revenue left after the costs of running the business, before interest and tax.

Of the 4.4% revenue growth, 3.8 points were organic, 0.3 points came from currency translation and 0.3 points from an acquisition (in Test & Measurement and Electronics). North America led with 6.0% organic growth.

Where the growth came from: a two-speed company

Three segments did all the growing and the margin expansion. CEO Christopher O'Herlihy attributed the top line to "accelerating demand in our capex-related segments, Welding and Test & Measurement and Electronics" (capex = capital spending, i.e. businesses buying equipment) and "continued strength in Polymers & Fluids." In each of those three, higher volume spread fixed costs over more sales: the "operating leverage" effect alone added 370 bps of margin in Test & Measurement and Electronics, 130 bps in Welding and 140 bps in Polymers & Fluids.

• Welding posted the highest margin in the company, 36.3%, up 370 bps. Of that, 220 bps came from the "variable margin and overhead costs" line turning favorable, a sharp reversal from Q2, when the segment's margin fell 70 bps on employee costs and price/cost squeeze. The tornado in late July took an estimated $40 million off Welding's revenue; ITW estimates organic growth would otherwise have been about 15%.
• Test & Measurement and Electronics grew revenue 17.3% in total, including 1.8 points from an acquisition. The acquired business carries amortization of acquired intangible assets (an accounting charge for the purchase price paid for customer lists, technology and the like), which cost the segment 110 bps of reported margin.
• Automotive OEM, ITW's largest segment by revenue, shrank 2.1% organically and lost 170 bps of margin, almost all of it (150 bps) from variable margin and overhead costs rather than lower volume. Construction Products lost 170 bps of margin on the same line (200 bps). The release doesn't say what drove those costs; that explanation should come with the 10-Q.

Margin: the self-help program did the heavy lifting

Company-wide, operating margin rose 40 bps to 27.8%. ITW's "enterprise initiatives" (mainly its 80/20 Front-to-Back process, which concentrates resources on the largest and most profitable customers and products, plus strategic sourcing) contributed 130 bps. Its margin bridge breaks the 40 bps down as:

So the 130 bps of self-help plus a now-positive price/cost balance were more than consumed by other cost increases inside that −60 bps line. ITW calls the $1.18 billion of operating income a quarterly record.

What the headline numbers hide

• A harsh tax comparison understates growth. The tax rate rose to 24.4% from 21.8%, because Q3 2025 included a $27 million net one-time tax benefit (a $43 million benefit related to the estimated 2024 US federal tax liability, partly offset by $16 million from a foreign tax audit). Excluding it, last year's rate was 24.3%, essentially the same as this year's. Pre-tax income grew 7.8% (to $1,131M from $1,049M); net income grew only 4.1% because of that tax comparison.
• Below-the-line income helped. "Other income" rose to $37 million from $12 million, while interest expense rose to $83 million from $75 million. Net, that added about $17 million pre-tax; the release doesn't explain the increase in other income. It means pre-tax income grew faster (7.8%) than operating income (5.9%).
• Buybacks explain about a third of reported EPS growth. Diluted shares fell 2.2% to 285.3 million after ITW repurchased shares through the year ($187 million in Q3). Operating income grew 5.9%; the shrinking share count pushes per-share growth roughly 2 points higher. Debt rose to $9.37 billion from $8.94 billion a year earlier, so the buybacks are partly funded by borrowing.
• Cash came in a bit weaker than profit growth. Operating cash flow fell 6.7% to $953 million while net income rose 4.1%, though it still covered 111% of net income (124% a year ago). Free cash flow (operating cash flow minus capital spending) was $851 million, 100% of net income. Year to date, free cash flow conversion is 82%.
• Receivables grew faster than sales. Trade receivables (money customers owe) were $3,516 million at quarter-end, up 8.0% from $3,255 million a year earlier, versus 4.4% revenue growth. Inventories rose 5.7%. Not alarming for one quarter, but worth watching against the full-year cash target.
• The tornado is a revenue drag, not a profit hit. ITW says the roughly $40 million lost revenue's operating income was "largely offset by business interruption insurance" and expects the impact going forward to be immaterial.

On balance the quarter is understated: reported EPS rose 6.8%, but excluding last year's $27 million one-time tax benefit it rose about 10%, which outweighs the lift from higher other income.

Did last time's read hold up?

Our Q2 2026 report named two things to watch in Q3. First, whether price/cost would turn neutral after costing 40 bps of margin in Q2: it did better than that, turning favorable to both operating income and margin. Second, whether North American food-equipment sales would stabilize after an 8.2% decline: the release doesn't give regional detail, but the segment as a whole grew 0.5% organically and its margin rose 60 bps to 29.8% (from a 60 bps decline in Q2), which points to stabilization; the 10-Q will show the North American figure. The broader worry, that growth leans on capital-equipment demand, still applies: Welding and Test & Measurement and Electronics are again the engine, and three segments shrank.

Guidance and outlook

The revenue-growth increase comes with unchanged organic guidance, so it reflects currency ("prevailing foreign exchange rates") rather than stronger demand. Nine-month EPS is $8.49, so the new midpoint implies about $3.01 in Q4, roughly level with Q3.

Our read: the raised range looks credible. Q3 delivered record margin with a tornado in the way, and Q4 only needs to match Q3's EPS. The weak points are the free cash flow target, which needs a strong fourth quarter to lift year-to-date conversion from 82% toward about 100%, and the three shrinking segments (Automotive OEM, Construction, Specialty), whose margins all fell. Watch in Q4 whether Welding's growth holds now that the tornado effect is gone, and whether Automotive OEM's cost pressure eases.

Takeaway: ITW's Q3 EPS growth was about 10% underneath a reported 6.8%, built on factory-equipment demand (Welding, Test & Measurement and Electronics) and a price/cost balance that finally turned positive, while Automotive OEM, Construction and Specialty Products shrank and lost margin. Three of seven segments are carrying the growth.